When you're living paycheck to paycheck, an unexpected expense can throw a wrench in your plans. While it may seem like you're alone in not having enough money in your savings, this is a common issue that affects millions of Americans.
You may be tempted to take out a payday loan or a cash advance when you need quick funding, but make sure you consider all of your options before you do.
The reason? A payday loan can send you down a dangerous road if you're not prepared to pay it off in time.
The Payday Loan Problem
Although payday loans can be a quick and convenient way to receive cash, they also come with some risks:
- Payday loans typically require repayment after two weeks (although some lenders may extend that period for four to six weeks). A lump sum that must be repaid by your next payday -- including fees and interest -- is not a valid or affordable option for many consumers. Along with finding the cash to repay the full loan amount, missing the initial payment and accumulating late fees can eventually land them in a cycle of debt.
- In addition to cost of the loan itself, paydays loans come with high interest rates or finance fees that are exponentially higher than a typical bad credit loan; and if you fail to repay your loan, you could face additional fees such as rollover fees, late fees, repayment plan fees, or even prepaid debit card fees.
- Furthermore, most payday lenders don't report payment activity to the three major credit bureaus (Experian, Equifax, and TransUnion), which will not help borrowers build (or rebuild) their credit history. When you have bad credit, taking out loans is difficult and oftentimes you will only qualify for loans with high interest rates (such as payday loans). Having good credit is a necessity to take out loans with lower interest rates and reasonable terms and when a lender reports your positive activity to the bureaus, your credit improves. However, make sure that you do pay your loan on time, even if it won't build your credit; if you default on your loan, your lender will probably report the negative activity to the bureaus.
- Payday loans are illegal in some states: Arizona, Connecticut, Georgia, Maryland, Massachusetts, New York, New Jersey, North Carolina, Pennsylvania, Vermont, and West Virginia. Many states put a cap on the interest rates to stop payday lenders from charging extreme amounts or deter them from operating within the state; however, some of these states will still allow finance fees. A few states will also limit how many payday loans a borrower can take out in a specific time period to prevent them from falling into a cycle of debt. Colorado has restricted lump sum repayment and requires a minimum term length of six months. Note: You can contact your state regulatory agency or state attorney general to see if a specific payday lender is licensed in your state. If they are not, their loans can be rendered void and they are not given the right to collect.
The Best Payday Loan Alternatives
Now that you're aware of the dangers of taking out a payday loan, what should you do if you are still in need of cash for an emergency?
It all depends on your situation. With good credit, your options are nearly limitless; but if you are struggling with bad credit, finding financing with reasonable rates and terms is difficult.
Below, we break down the best alternatives to a payday loan.
Pros: Helpful in finding a long-term solution or previous options you hadn't considered Cons: Typically comes with fees, which can be difficult when you are already in need of cash
While credit counseling may not be a short-term fix for your current financial needs, it can help you find a solution for the future by dealing with underlying issues (such as overspending or not budgeting enough) and getting your finances in order.
A credit counselor will examine your financial situation and make recommendations based on that. Talking to a credit counselor can help you find options you may not have known about previously to help you receive the cash you need.
Financial Assistance Programs
Pros: Local and national programs and nonprofits can help you find free assistance. Cons: Not everyone will qualify for the requirements set by financial assistance programs.
Depending on your circumstances, a financial assistance program may be able to find you free help with low-interest loans, bills, and even food.
Ask Your Family Or Friends For Help
Pros: Family and friends are more willing to help you out. Cons: This can potentially put a strain on your interpersonal relationships.
Trusted family members and friends may be able to cover an unexpected expense and this likely won't come with interest. However, you don't want to make a habit of this, and if you fail to repay, you can damage your relationship with them.
Tip: Draw up a written agreement with the agreed-upon amount and repayment terms to avoid any potential problems in the future.
Ask Your Employer For Assistance
Pros: You may be able to receive an advance free of interest. Cons: If you are living paycheck to paycheck, covering the costs of an unexpected bill may not leave you enough for the next month's expenses.
If you work regular hours and have a good relationship with your employer, they may be willing to extend you an advance or a financing program. Unfortunately, this is not always an option, nor is it a solution for recurring debt.
Find A Side Gig
Pros: This can be a way for you to utilize your talents and skills for cash. Cons: Making enough to cover your expenses through freelance work may be difficult.
A side gig can help you cover expenses by allowing you to make quick cash through a variety of means such as ridesharing, car sharing, renting out space in your home, equipment rentals, catering, delivery, online surveys, market research, or performing.
Sell Your Belongings
Pros: You can make cash almost instantly by selling unwanted or unnecessary items. Cons: You may not make enough or you may end up having to purchase the same item again at a later date.
Services such as Craigslist, Ebay, and Facebook Marketplace allow you to sell belongings (like new and gently used clothing, electronics, and furniture) quickly.
Pros: You may be able to reach a settlement or create a payment plan with your creditors. Cons: Negotiating with creditors is difficult if you lack the experience.
At the end of the day, your creditors want to get paid. This means that if you are struggling to pay off your debt, they will be more likely to agree to a payment plan or settlement. You can contact the company directly and let them know about your situation. They may be willing to work with you on a settlement or debt management plan. If this doesn't work, you can turn to a debt relief service to help you in dealing with your debt.
Use A Payday Alternative Loan
Pros: PALs generally have lower interest rates. Cons: May take a few days to receive the funds.
Some banks and credit unions offer payday alternative loans (PALs). These loans can provide you with amounts between $200 and $1,000, while interest rates are capped at 28% (as required by the National Credit Union Administration). Term lengths are usually one to six months.
PAL applications usually take a few days to process, so if you need same-day funding, this probably isn't your best option.
Turn To Your Local Bank Or Credit Union
Pros: Easier to acquire if you are a member of a local bank or credit union. Cons: May have strict requirements.
If you are a member of a local bank or credit union classified as a Community Development Financial Institution, you may be able to qualify for small loans from local nonprofit lenders. Many of these lenders have requirements that may include living in a certain area or working in a specific industry.
Use A Pay Advance App
Pros: Allows you to borrow an advance with minimal fees and interest. Cons: Can be difficult to acquire if you don't have a steady income.
Payday advance apps allow you to borrow an advance of $100+ with low fees and interest. The amount borrowed may also depend on how much you earn monthly. Some of these services require a monthly membership fee or that your employer is a part of the program.
Turn To Debt Relief
Pros: Can be a long-term solution to your financial problems. Cons: Only works for debt and not upcoming and unexpected expenses.
If you are struggling with high-interest debt, a debt consolidation loan may be the best option for you. Debt consolidation allows you to combine high-interest debt with multiple payments into one single low-interest payment.
Consolidating your payments -- especially with lower interest -- can make it easier for you to keep up with your monthly payments and set enough aside for any unexpected emergencies.
You can also consider turning to other debt relief options such as debt settlement or a debt management plan to tackle your unpaid bills.
Pros: Can potentially help build your credit and qualify for credit card perks, lower fees, and rewards in the future. Cons: Not an ideal solution if you need cash.
Credit cards can help you cover bills that don't require cash payments. While they can help you cover a short-term expense, they also come with higher interest rates. If you fail to pay off your bill by the time it's due -- or only pay the minimum required payment -- you will be charged added the full amount plus interest. This can lead to a cycle in which it becomes difficult to fully pay off your credit card. However, the interest on a credit card is still better than a payday loan.
If you have maxed out your credit card and you can't pay it off, you can apply for a 0% balance transfer credit card. This 0% interest period lasts several months to a year and allows you to have time to pay off your full balance. Keep in mind that once this 0% interest period is over, you will have to pay high interest.
Pros: Lower interest rates, longer repayment terms, and unsecured loans Cons: Borrowers with bad credit may end up with high interest rates.
Personal loans can be used for a variety of reasons -- including emergency expenses and paying off debt. Taking out a personal loan is as simple as visiting an online lending network or visiting your local bank or credit union. Depending on the lender, you may be able to receive your funds on the same day or the following business day.
Personal loans come with lower interest rates than payday loans but if you are struggling with bad credit or no credit, you will most likely only qualify for loans with higher interest, shorter repayment terms, and smaller amounts. An unsecured personal loan is also not tied to any collateral, so you will not risk losing any of your belongings.
Alternatives To Avoid
Below are some other alternatives to payday loans. However, be sure to exercise extreme caution if you are considering these:
- Auto title loans: Auto title loans may have lower rates than payday loans, but they come at a cost; namely, the title of your car is used to secure the loan. If you fail to pay off the loan on time, you risk having your vehicle repossessed -- along with facing high fees and interest.
- Cash advances: You can receive a cash advance from your credit card but they come at a high price: 5% of the advance or $10 (whichever is greater), along with accrued interest.
The Bottom Line
Unexpected expenses and bills shouldn't mean that you need to turn to loans with exorbitantly high fees and interest rates. Instead, compare your potential solutions and speak to a professional to find the best option for you. Don't know where to start? Turn to our top services and find the best one for you.
Are payday loans illegal?
This depends on the state in which you reside. Payday loans are currently illegal in the following states:
- New York
- New Jersey
- North Carolina
- West Virginia
Why are payday loans considered bad?
While they can provide you with quick, much-needed cash, payday loans come with fees and extremely high interest rates in the triple digits. If you fail to pay off the initial loan, it can land you in an endless cycle of debt.
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