When money is tight, the payday loan’s promise of quick cash with minimal bother might seem like an appealing choice.
Although payday loans are dangerous because of their high-interest rates, they become much riskier when renewed. The Consumer Financial Protection Bureau advises that several states let payday loans roll over if you cannot pay them back by the due date.
In this scenario, although the loan’s due date is prolonged, you would just make the fees owing. You would still owe the initial sum after paying a renewal or rollover cost, a potential late fee, and other fees. This is what triggers a costly debt cycle.
The good news is that payday loans aren’t your only choice if you find yourself in a bind financially. Here are some other options to think about.
What Exactly is a Payday Loan?
A payday loan is a brief form of borrowing money, either at the office or the payday app meant to cover an emergency cost and get you by until your next paycheck from your work.
When you’re in a bind, their simplicity and ease of approval may make them seem like an appealing alternative, but the results of taking out one of these loans may be disastrous.
For every $200 borrowed, fees for these short-term loans typically vary from $20 to $50. Based on such costs, a $600 payday loan may incur as much as $200 in fees. Fortunately, even for people with bad credit, there are superior, less expensive alternatives to payday lenders.
Possible Options For You
The ideal payday loan substitute is to never borrow anything at all. Think about whether you need the money. Payday loan companies sometimes promote their loans as ideal for covering the cost of evenings out, new clothing, or other luxuries. But if you still find yourself in need of more funds, consider your choices below.
Enlist The Aid of Charities and Organizations
Many charitable and not-for-profit organizations provide financial aid to persons in need. In addition to financial aid, these groups could also provide services like job training, educational courses, and mentoring to assist you in getting back on your feet.
A nonprofit’s financial assistance is a gift that has no conditions and requires no repayment. Additionally, because it’s free money, there may be a fierce rivalry for it. It can take some time for any money or aid to come, and you’ll need to demonstrate your eligibility. The cash could also be set aside for groups like the aged, unemployed, disabled, or ill, depending on the program.
Borrow Money from Family and Friends
Another option is to ask your family or friends for a loan, which can help you avoid the hefty interest and costs of payday loans. Additionally, because you don’t have to go through the official application procedure, it may be simpler to receive the money you want.
Once the relative or friend has given their consent, you should draft a loan agreement that specifies the conditions of repayment and the interest rate (if any). One thing to remember: Pay back the loan promptly to keep your connection with the family member strong.
Consult a Credit Counselor
If you and your creditors are unable to reach a compromise, consider seeking assistance from a nonprofit credit counseling organization. By negotiating with your creditors to lengthen your repayment periods, reduce your interest rates, and eliminate fees so that you owe less each month, a professional credit counselor may help you put up a debt management plan. After receiving a single payment from you, the credit counseling organization subsequently pays your creditors every month on your behalf.
A credit counselor may also provide you with budgeting advice, tools, and techniques for managing your debt, as well as more information and resources to help you get your finances in order. That way, you won’t need to borrow money to take care of your necessities. These services are often provided without charge or for a little price.
Utilize Your Emergency Fund
It’s a smart idea to utilize your savings if you have some. It is doubtful that you would ever earn on your savings more than you would spend on a loan in interest. That implies borrowing money, particularly a payday loan, will almost always be more expensive than using your savings.
Think About Getting a Low-interest Credit Card
You may be able to get a low-interest credit card or the at least one with an annual percentage rate that is far lower than the APR for a payday loan, although your credit may now be a little shaky. A balance transfer card might provide you some breathing space if you’re struggling to pay off credit card debt. To be eligible for a credit card with a low-interest rate, you’ll normally need excellent credit or better.
Lending Networks
Receiving money with little or no interest as long as you’re prepared to provide money to support someone else as well.
A lending circle is made up of several individuals who lend money to one another for free or at extremely low-interest rates. Participating in a lending circle might help you generate money for things like a vehicle repair or get you through a difficult period. It is a rather long-term commitment since lending circles typically raise money for one individual each month.
You may enhance your credit by using some websites that collaborate with lending circles to submit payments to the three main credit agencies.
To consistently make contributions to the lending circle fund, you need to have a reliable source of income.
Purchase a Personal Loan
Even though banks are known for their bureaucracy and lengthy procedures, you shouldn’t overlook your neighborhood bank when you’re in a bind. A personal loan through a bank or credit union could be a lot more affordable option than a payday loan if you need money for a particular requirement.
You may examine your eligibility for rates and conditions with online lenders without having to submit to a strict credit check. Even while these choices don’t provide cash immediately, like payday loans can, if you’re authorized, certain personal loan options might fill your bank account in a matter of days.
They may also be an excellent choice for individuals with less-than-perfect credit. Remember that if your application for a personal loan is granted despite having bad credit, you will have to pay a considerably higher interest rate. It will still be far less than the fees associated with a payday loan, however.
Why Do People Take Out Personal Loans?
Every year, approximately 12 million Americans utilize payday loans.
Surprisingly, more than 60% of borrowers of payday loans utilize the funds to pay regular necessities like rent, groceries, and credit card payments. This reveals that the majority of borrowers of payday loans have a persistent desire for more income and a lack of available cash.
Check out the graph below to discover the demographic breakdown of payday loan use.
Conclusion
Although payday loans are simple to get, there may be a high cost for clients. Consequently, you already have a list of potential substitutes. Compare each choice and decide which is best for your particular circumstance. The best choice for you is probably the most affordable one you qualify for.