Better Alternatives to Payday Loans

As we know, life has a knack for throwing us unexpected bills when our checkbook isn’t flush. Borrowing money for a short period of time through payday loans may appear to be the only way to meet this need; however, these types of loans will generally extend the problem and usually increase the total cost.

If you are thinking about using payday loans, the following are a few easy-to-follow steps to help meet today’s financial obligations without creating problems for tomorrow.

The True Cost of Payday Loans

For many, it appears that traditional short-term lending products are the solution to their financial emergencies. However, most do not realize that payday loans have costs that are exponentially higher than they initially expected. The fee structure for payday loans can result in interest charges of 400 percent per year, or even more. You can easily find yourself owing twice or three times the amount you originally borrowed. A $500 emergency can easily turn into a $1500 problem.

This cycle is very typical. You borrow money to pay for an expense, struggle to pay off the entire amount borrowed, and then must take out another loan simply to keep afloat. Studies show that 80 percent of borrowers will either roll over (or refinance) the previous loan or take out a new loan within two weeks. This is both costly and tiring, and can be avoided by using alternative payday loan options.

Personal Loans – A Smart Payday Loan Alternative

Consider personal loans to be the intelligent cousin in the lending family. Personal loans provide you with something that payday loans cannot provide – time and reasonable interest rates. When compared to the exorbitant interest rates charged by payday lenders, personal loans offer a much lower APR (average annual percentage rate). APRs for personal loans range from 6% to 36%. Since these loans offer a longer repayment period (months or years rather than weeks), the monthly payments are also much more predictable.

Personal loans work similarly to a customized fitting tool in your financial toolbox. For example, if your car breaks down and you need to replace your transmission and the repair bill is exactly $2000, you can borrow that exact amount, and your monthly payment will remain the same every month. There are no guesswork situations. As long as you continue to make timely payments, your on-time payment record will be reported to the credit reporting agencies, and your credit score will improve. Therefore, today’s auto repair problem can become tomorrow’s improved credit history.

Credit Unions Offer a Safer Borrowing Option Called A Payday Alternative Loan (PAL)

When you’re a member of a credit union, you have a better way to borrow money. A Payday Alternative Loan (PAL) is a low-cost alternative to high-interest payday loans. Under federal law, the maximum interest rate on a payday alternative loan cannot exceed 28 percent.

Credit unions offer PALs in amounts ranging from approximately $200 to $1,000. Members may have up to 6 months to repay the loan. The application process is easy and quick, and credit unions look at all of your financial history rather than relying solely on your credit score. A credit union offers a type of “neighborhood” banking where they will help you get back on your feet, rather than burying you under a pile of debt.

Installment Options: Structured Relief

Sometimes life has a way of throwing you curve balls when you least expect it — a roof leak, a chipped tooth, a sputtering engine, etc. Online installment loans can provide the emergency cash you need now, and allow you to make 24 consecutive equal payments until the loan is paid off. Your monthly payment remains constant throughout the term of the loan, so you’ll know exactly how much money you’ll be paying each month to repair whatever broke down.

Access to Emergency Funds Without a Hard Pull on Your Credit Report

When emergencies happen, time often isn’t on your side, and good credit is not an option. If you need money quickly, you may be able to get an emergency loan with no hard inquiry to your credit report. Just remember, there’s usually a price tag attached to the convenience of getting money quickly.

The first thing to do when applying for one of these emergency loans is to determine exactly how much you need, so you can avoid overspending. Also, create a solid repayment plan. Lastly, carefully read through the terms of the loan, including any fees associated with the loan, and calculate the total cost of the loan, not just the monthly payment. This will protect you from making a bad situation even worse.

Leveraging What You Have: Secured Options

Securing a loan with something you currently own (e.g., an equity-free vehicle or a savings account) will typically lower the interest rate on the loan by offering the lender collateral to secure their investment. Title loans and savings-secured loans are two common types of secured loans that people take out every day.

But it is critical to understand that the collateral is also your responsibility. If you fall behind in making your payments, you may be required to surrender the collateral you used to secure the loan. If you can afford regular payments, a secured loan can provide you with access to larger amounts of money and lower interest rates compared to using unsecured forms of credit. Understand the risks of taking a secured loan and compare them to your current financial situation before signing.

Community Resources: Free Payday Loan Alternatives

Before jumping to a payday loan and adding another high-interest monthly bill, stop and explore the help that has been embedded in your community. Churches have smaller emergency funds to assist with power or water bills. Non-profit organizations provide assistance with grocery purchases or a week’s worth of rent as well when paychecks dwindle. City and County Agencies also offer Utility Vouchers or One-Time Grants to assist with housing and keeping the lights on.

The purpose of these programs is to be there for you in times of crisis. Taking advantage of the support provided by these programs will allow you to avoid accumulating high-interest debt. A single phone call to 211 (or visit 211.org) will identify all resources available in your immediate area. The service is available twenty-four hours a day, seven days a week; it is free and confidential; it identifies Food Banks, Energy Bill Relief, and other safety nets to assist you in stabilizing until you are able to get back on your feet.

Building Your Financial Foundation

While today’s fire can be put out, creating a small buffer of safety today will keep tomorrow’s spark from igniting another flame. Place $25 per month into a separate savings fund; with 12 deposits, this creates a $300 reserve, which is enough to fix a tire or cover an unexpected copay without taking on debt.

Creating a quick picture of your current budget helps identify where you are able to find the additional funds. Free budgeting apps on your smartphone or even a basic spreadsheet can help you see each coffee trip and all of your infrequently viewed subscriptions in black and white. By replacing one of your dinner trips to a restaurant with cooking at home and canceling one of the channels you rarely watch, your savings will add up quickly like coins found under the cushions.

Once the funds have been moved into their own savings account (away from being spent as part of daily expenses), it becomes much easier to resist the temptation to use them for things such as tickets to a concert. Most banks allow you to automatically transfer funds to your savings account. The savings account will grow slowly over time, allowing you to continue working toward other goals. In addition, those consistent monthly contributions to the savings account will develop a reliable financial safety net to catch the next unexpected expense.

Technology: Your Financial Ally

Having a smartphone puts a personal money advisor in your hand. Budget apps will track where you’re spending your money, remind you when a bill is coming due, and can even help you negotiate a lower price. Apps like round-ups take the leftover money from regular purchases and place it into an easy-to-use emergency fund – without requiring you to think about it.

Searching for loans online also speeds up the comparison of different lenders and their offers. In minutes (or less), you can find out which lender has the lowest interest rate and compare it side-by-side to other lenders’ offers. Online-only banks do not have the cost of running a physical bank, so they often offer higher interest rates and lower fees than traditional banks. When such tools are used together with technology, they create a budget plan that works with you rather than against you.

Choosing the Best Option for You

Unfortunately, there is no one-size-fits-all solution to dealing with financial challenges. Ultimately, the right financial product or service for you is based on several things: the amount of money you need to borrow, how long it will take to repay, your current credit situation, and what resources you have available to you. The most important thing to avoid is falling into the payday loan trap by taking some time to evaluate all of your options against your own unique set of circumstances.