We’ve all seen the commercials. A young man’s car breaks down and he’s in need of money, fast. He turns to a payday loan company for help; within minutes, he has cash in hand to fix his car and go on his way. Then, a tiny disclaimer scrolls by, in letters too small and at a speed too fast for a normal human being to read. What it says is that if you choose to use their services to obtain a loan, you face an outrageous interest rate and fees that will make it nearly impossible to pay back the loan in a timely manner.
Payday loans are loans for an unexpected expense that you pay back quickly, by your next payday, to avoid the exorbitant fees and interest. Few are able to do this, however, and become trapped in a cycle of debt that takes years to escape.
How They Work
When you go to a payday lender, the lender will ask for pay-stubs or some other proof that you currently have a job, and you need to have a checking account. That’s all the information necessary. The lender will ask you to write out a check in the amount of the loan and any attributed fees, but will have you postdate it two weeks. If you have not paid the loan off within the two weeks, the lender will cash the check. Because they’re ideally short-term loans, you would’ve paid off the loan before the fees and interest began to grow. However, this rarely happens.
People without savings to cover unexpected expenses are generally living paycheck to paycheck. The majority of borrowers can’t pay the loan back in that short amount of time and will have to roll over their loans many times over, which piles on the fees, making it even more difficult to pay off, trapping the borrower in a cycle of growing debt. Because they’re annualized, the percentage rates on payday loans can be more than 400%.
Payday Loans by the Numbers
According to Pew Research, 12 million Americans take out payday loans each year. Most are young and earn less than $40,000 a year. Most do not have a four-year college degree, and the rate of borrowing is highest in minority communities. The Center for Responsible Lending says that payday loans cost lower income families more than $3.4 billion in fees each year, with $2.6 billion of that due to borrowers turning their loans over repeatedly. In fact, a study by the Consumer and Financial Protection Bureau on the usage of payday loans over a 12-month period found that nearly half of borrowers had more than 10 transactions, which means they rolled over their loan nine times. Lower income consumers who take out payday loans with the intention of paying them back quickly simply can’t.
What You Can Do
If you find yourself in an emergency where you need money immediately, there may be alternatives that can keep you from getting into the cycle of debt that payday loans can cause.
Assess your situation
Most of the time, if you’re in a hurry to get a loan, you’re not going to get a good deal. If you can, take the time to consider all of your options. You may find that your situation isn’t as dire as you first thought, and you may be able to come up with alternatives. A payday loan should be your absolute last resort.
Talk to banks and credit unions
They often offer short-term loans at a competitive rate. It pays to shop around to find out if you qualify.
Talk to your boss
Depending on where you work, your boss may allow you to take an advance on your paycheck, but consider this option carefully as it could affect your career options. In addition, if you’re living paycheck to paycheck, you’ll end up short on your next paycheck, which simply kicks the debt can down the road.
Look for apps
Several apps exist that could let you access your paycheck early (ActiveHours.com), allow you to balance paychecks when you may get one that’s lower than normal, and access interest-free loans (Even.com).
Even putting $2 or $3 a week away will add up, and when something unexpected comes up, you might just have enough set aside to cover it. At the very least, it means you wouldn’t have to borrow as much. Learn about savings tips and other ways to become financially stable so you can avoid this issue in the future!
Talk to your creditors
If you need money to pay a loan or bill, ask your creditors if they can help. Many will work with you to come up with a plan to pay the bill over time.
Check with your church
Many churches or other local community organizations offer assistance to those in need.
Use a credit card cash advance
Although this should be far from your first option, a credit card cash advance usually has much lower rates than a payday loan does.
Use your retirement account
You may be able to borrow money from your IRA or 401k account. Usually, any interest you have to pay goes back into your account.
Get a life insurance loan
If you have cash value in your whole life insurance policy, you may be able to borrow from it. You have the rest of your life to pay it back, and if you fail to do so, the life insurance company will deduct it from the amount that the policy pays out upon your death.
If you have something of value, you may want to consider pawning it.
Talk to a friend or family member
Financial dealings with family members can be tricky, so if you go this route, be sure to arrange a realistic payment plan and stick to it so you don’t put your relationship at risk.
Remember, if you find yourself in a financial emergency, the best thing you can do is look for alternatives to high-interest loans that could trap you in a cycle of debt. Your wallet will thank you!