Payday loans, also known as cash advance loans or check advance loans, are loans that are given based on proof of income, some personal information, and government issued identification. These loans generally are targeted towards low-income earners who may not qualify for a loan from a bank or credit union due to poor credit history.
Payday loans may seem like a good resource when in a bind, but should not be used if they cannot be immediately repaid or if there is a high likelihood that you will need another one in the near future. If your debt is not repaid by the specified loan term, you face additional fees for failure to repay.
According to Pew Charitable Trusts, over twelve million Americans take out a payday loan each year. They also found that most of these borrowers earn less than $40,000/year and are not married. This same report also shows that the average borrower takes eight loans at $375 and end up paying $520 in interest only before the initial loan is repaid.
Beware of their tricky loan practices
Instead of advertising the interest rates, a monthly or weekly fee is advertised. For example: Just $50/week until the payment is made in full. This may sound great, until you realize that your loan term is 6-12 months and that this means you will be paying $200/month in interest alone. Once you realize that you aren’t actually able to make these payments, you are charged late payment fees. In most cases, you can end up paying over 200% back on the amount you initially borrowed. These payday lenders use these tactics to keep you in debt, but there are other ways to get the funds you need.
Before applying for a payday loan, you should consider other options:
Ask your employer for a check advance
While this may not be an option for everyone, it never hurts to ask your Human Resources department for an early wage payout or even a paid-time-off payout in advance. This may keep you from hefty repayment fees from the payday loan.
Withdraw from your savings or investment account
If you have an investment account that you cannot withdraw from without penalty, this may be a time to reach out to your accountant or a tax advisor to see if the penalty is worth paying. If you have a savings account that you are trying not to use, it is the best option when you need money in a pinch.
This option may not help you today, but if you are noticing that you are short on a monthly basis, a payday loan is definitely not for you. Refinancing may allow you to skip your next payment and then also provide a lower payment going forward. This may help with the ongoing struggle of living paycheck-to-paycheck.
If you have a mortgage and your credit or the market has improved since your purchase, it may be worth discussing with your bank or credit union. Again, this may provide a way to ease the burden of your monthly bills.
Reputable personal loans
FDIC or NCUA-insured banks and credit unions offer different types of personal loans. Speaking to your bank is a great option to ensure you are not being taken advantage of with ridiculous interest rates.
Lower insurance premiums
Lowering your home, life, auto, and health insurance are all ways to make sure you are getting the best deal on your monthly payments. Shop around for rates here.
Request an extension from your creditor
Some creditors are willing to work with you if you have a plan to pay them back. A simple phone call explaining your situation may keep your accounts out of collections and buy you some time to come up with a plan to repay.
Ask family for help
While most people are not interested in asking for help, this may the be best option in most cases as you can potentially have access to the money you need immediately. If you take out a payday loan instead and have issues repaying, you may end up asking for help later to get out of a worse situation. Weigh your options and talk to your family.
If you have ever used a payday loan, we would love to hear about your experience.