It’s the end of the month, and money is tight. You’re suddenly hit with an unexpected expense, such as a car repair or an overdraft. This can throw your budget out of control. Perhaps you’ve seen advertisements for payday loans and thought that this might be what you need to make it through the week.
Payday loans are a short-term financial choice that can lead to long-term problems. These include excessive interest and dealing with payday lenders who want to repay the loan. There are many other ways to avoid getting a payday loan.
What is a Payday loan?
A payday loan can be a short-term loan that is provided by outside lenders. These loans typically have terms of between two and four weeks or until your next payday. Payday loan terms are subject to regulation in many states. You can expect to pay between $10 and $30 for every $100 borrowed, or 400% to more interest, based on the annual percentage rate (APR), according to the Consumer Federation of America.
Payday loan regulations can vary from one state to the next, and some states have banned them altogether. Payday lenders do not usually require proof of credit or proof that the borrower can pay the loan back. If the borrower is unable to pay the loan back as agreed, these loans are often reborrowed or rolled over. This can lead to higher borrowing costs.
Payday loan borrowers may come from low-income communities or have limited access to other financial tools that offer better financial options. The Consumer Financial Protection Bureau shows that payday loan borrowers tend to be women, Black and Hispanic, consumers with low education, consumers between 40 and 61, and those with a minimum of a high school degree. According to the CFPB, 60% of people who use alternative financing (specifically title loans, payday loans, and pawn loans) say they were turned down for mainstream financing.
Payday loans, despite their ease of access, can lead to costly debt for borrowers.
Alternatives to Payday loans
These are some alternatives to payday loans if you need cash to cover your expenses until the next paycheck.
Apply to get a personal loan. Lenders or credit unions may be able to lend you the money that you need, even if your credit score is poor. You don’t have to be a member to apply for a loan at a credit union. You can also get loans from other lenders, such as online loan providers. These loans are available to people with poor or fair credit. Often, they start at $1,000.
Talk to family and friends. Ask a close friend or family member for a loan. This could be a good option even if it is uncomfortable. As long as the loan agreement is in writing and you stick to the terms, it may be worth the effort. This option can potentially impact your relationship. Take care and don’t agree to repayment terms you are unable to meet.
Find local resources. Contact local non-profits that help individuals with financial problems. Reach out to local food pantries if you are unable to purchase groceries for the month. To find out more about your local services, you can either call 311 or search online for them. You may be in need of long-term assistance. For this reason, you should look into general financial aid programs.
Ask your employer about short-term loans for employees. You may find that larger organizations have access to short-term financial resources or can provide guidance about how to get in touch with local organizations that might be able to help you.
Learn about early payday apps. They may be offered by your bank, employer, or another company. These early payday apps usually provide a portion or advance on your future income. Although not a long-term solution for payday loans, early payday apps are a cheaper alternative.
Borrow money from your credit cards. If your credit score is good and you know that you can pay the amount quickly, you might consider a cash advance for your credit card. You should check the interest rate on this advance before you use it. Many cards charge more interest on cash advances than regular purchases.
Don’t let fear dictate your decision. Take a moment to look at your options and research. You can also contact your bank to discuss the possibility of negotiating the terms of your unexpected bill or arranging a payment plan. You might consider selling any items that you don’t need. You can also start a side business to make extra money. There are many options for side hustles, including volunteering at a special event or providing services like cleaning, cooking, or pet sitting.
What Does a Payday loan Do to Your Credit Score?
Payday loan companies won’t usually check your credit report or report to credit bureaus. If you take out a payday advance and repay it as agreed, there may not be any change in your credit score.
If you are unable to comply with the terms of the loan and stop repaying the loan, the lender could turn over your account to a collection agency. This will likely show up on your credit report and have an adverse effect on your credit scores.
How to deal with existing payday loan debt
Before your account becomes past due, negotiate with your lender if you can. Talk to your lender if you are already at this point. They may be able to help you get on track. Payday lenders are required to offer extended payment plans (EPPs) in many states. The agreement may extend your loan repayment term and lower your monthly payment. You may also consider a consolidation loan or loan management plan to help pay off your payday loans. This is an in-depth plan that will pay off your debts.
The bottom line
Don’t let financial distress get you down. But, take the time to evaluate your financial situation before you make any decisions that could further complicate your finances. There are many things you can do before you agree to any financial tool that could potentially cause harm to your long-term and short-term finances.