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Do you find that you need to take out payday loans either occasionally or on a regular basis? Twelve million Americans do. And people, who take out payday loans spend approximately $7.4 billion each year at hundreds of websites and 20,000 storefront locations in addition to an increasing number of banks. The average borrower actually takes out a loan for $375 each and spends an amazing $520 on interest. Three quarters of them used storefront lenders, while 25% got their payday loans online.
The renewal fees
There are a number of reasons to avoid payday loans like the Ebola virus. The biggest of these is probably their renewal fees. If you find you can’t repay one of these loans you will need to either renew it or get another one. While you may be making payments on that loan the amount that you owe never get smaller. Here’s an example of how this works. Let’s say that you borrow $400 with a $60 interest payment and are then required to renew the loan for four months. This means your interest will total $480 but you will still owe the original $400. That’s just not a very good deal.
What happens if you don’t pay
The second biggest reason to avoid payday loans is because of what happens if you don’t pay. While the lender has the right to collect on the debt by taking money out of your checking account the problem is what happens if there’s not enough money in your account to cover it. If this is the case, you will get socked with a very big bank fee and the lender won’t stop trying to collect its money. It may even sell your debt to a debt collector who will hassle you unmercifully until you repay it.
The impact on your credit
The third reason to avoid payday loan is because of the impact it will have on your credit. The credit bureaus can learn that you had taken a payday loan (or loans) even if it’s not reported by your lender. And if it’s sold to a debt collector, the collection agency will report it.
The number one reason to avoid payday loans
Finally, you can’t pay off a payday loan gradually. At the end of two weeks, you will be required to pay off the entire sum with principal and interest. The problem is that most borrowers cannot come up with this amount of money so they just renew their loan or take out a new one. This is called the cycle of debt.
Six options
You can avoid getting caught up in the cycle of debt as there are good options to payday loans and here are six of them.
Make a budget
The problem with payday loans is that you’re treating the symptom and not the cause. Most people take out payday loans to cover their day-to-day expenses because they’re living beyond their means. You could avoid this by having a household budget. This means taking a hard look at all your expenses and then figuring out what you can really afford to spend on each of them. You would then need to find ways to trim those expenses so that you’ll be spending less than you earn.
If you’ve never created a budget, here’s a video from Bank of America that explains how to do this in six easy steps.
Get emergency assistance
If you cut your spending to the bone and find that you still can’t make ends meet, there are ways to get help. Many community organizations and churches will provide assistance with utility bills, food, rent and other emergency needs. Some also offer loans in small amounts at very low interest rates. It’s also possible to get housing assistance. If yours is a low-income household you could probably take advantage of subsidized housing or vouchers that would cover a portion of your rent.
Obamacare includes subsidies to pay for health insurance if yours is a low income household. If your income is low enough you might be able to get free health coverage through Medicaid. And, again, if you have a really low income you would likely be eligible to receive food aid through the Supplemental Nutrition Assistance Program. This is the program that used to be known as food stamps.
Pay your bills late
A payday loan can look like a good bridge if you have a bunch of bills due for payment on Monday but your next paycheck isn’t until Friday. If this is the case, you’d be better off paying those bills late than getting a payday loan. You may have to pay a late fee but not in all cases. For example, many utility companies will accept late payments without charging a fee. But even if you are charged a fee it will probably be much less than the interest you would pay on a payday loan. If you were late on your rent you might be charged a fee as high as 5%. This means if your rent was $600 a month it would be $30, which again will be much less than the cost of a payday loan. And some landlords don’t start charging a fee until you’re 5 to 10 days late. And most banks will not charge you a late fee on a car payment until you’re 10 days overdue.
Deal with your debts
Believe it or not you can negotiate with your lenders instead of just putting off your bills. For example, you could negotiate to get your interest rate reduced, which would mean a lower payment. You might also get one or more of your lenders to accept lump sum payments for just part of what you owe. Or they might be willing to work out a plan where you make your repayments a little at a time. This would free up money you could use to pay for other expenses that are more urgent such as your utilities.
Pawn or sell stuff
Do you have some high-value items just sitting around on a shelf or in a closet? This would include collectibles, musical instruments, jewelry and new or old electronics. If you find that you do have some of these items, you could sell them on eBay or Craigslist or take them to a pawn shop. This is where you’ll be charged a fee and will need to reclaim the item in one to four months. If you fail to reclaim your item, the shop will keep it and then sell it to someone else.
Get your paycheck early or a paycheck advance
Finally, ask your company’s HR department if it would be possible to get your check a little early or if you could get an advance on your paycheck. The better option would be to get your check a little early. That’s because the problem with an advance is that your next paycheck will be short so you will have less money available to pay your bills and you could easily slip into that circle of debt.
Frequently Asked Questions About Payday Loans
Q. Which payday loans require no credit check?
A. Very few payday lenders require a credit check. The reason for this is that payday loans are typically for small amounts such as $200 or $300 and it’s simply not worth what it costs for a payday lender to have your credit checked.
Q. Which payday loans are the best?
A. One review site ranks the online lender 100DayLoans as best because the site is very easy to use. The second ranked payday lender on this website is NetLoanUSA. Lenders with local locations that are considered to be among the best are Check ‘n Go and Check Into Cash, which has about 1000 stores nationwide.
Q. What is payday loans online?
A. This is simply website-based payday lenders. As reported above the best of them have websites that are easy to use and some will even direct deposit the money into your checking account. The downside of these lenders is that if you have a problem there is no person you can go to for help or to get questions answered. On the positive side, the better online lenders generally charge lower fees than do storefront operations.
Q. What payday loans are safe?
A. Safe online lenders include the aforementioned 100DayLoans.com and NetLoanUSA.com, as well as 247Loan.com and LendUp.com. Safe payday lenders with local offices include Speedy Cash, Cash Central and Pay Day One. Beyond this, if you are considering a local payday lender be sure to check it out with the Better Business Bureau.
Q. Where are payday loans legal?
A. Payday loans are legal in every state except Arizona, Connecticut, Maryland, Massachusetts, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia where they are prohibited. Online payday lenders must have a state license to do business where you live. You will have to read some very fine print to learn whether a particular payday lender is licensed in your state. If it’s not, it’s probably breaking the law.
Q. What payday loans are good?
A. No payday loans are good. They’re basically designed to trap you into a never ending cycle of debt. If you have a pressing bill such as your rent or utilities then you might use a payday loan to cover it. But if you do it’s critical to pay off your balance and interest after the two weeks. If you choose to renew the loan or get a new one that’s good for the payday lender but very bad for your finances.
Q. What payday loans am I eligible for?
A. To be eligible for a payday loan you must be at least 18 years of age, have valid identification and an active checking account and must be able to provide some proof of income. If you meet all of these requirements you may be able to get your money in as few as 15 minutes. The amount of money you will be able to get will vary depending on your income and the payday lender.
