The following is a guest post from Gerrid Smith is CEO of the charity-focused coupon website, Save1. They provide coupons and deals from over 5,000 online stores! Each time a coupon is used, they provide a meal to a child in need.
When you examine the numbers, it’s difficult to deny that payday loans are detrimental to your finances. A new study from Insight Center for Community Economic Development found that $774 million in economic activity was lost in 2011 along with 14,000 jobs. There were 56,230 personal bankruptcies related to payday loans that stripped the economy of an extra $169 million.
In a $15 trillion economy, $943 million is barely worth mentioning but what makes it important is that these are real people with real families. They aren’t mere numbers and statistics. They’re unable to makes ends meet and they’re turning to what is probably the most customer unfriendly financial product on the market.
Payday loans are short-term loans designed to be repaid on the borrower’s next payday. The loan is often secured by providing a postdated check or by providing the lender electronic access to the person’s bank account.
The problem is the interest rate. Often 200 to 500 percent, these loans rob the already cash-strapped consumer of funds they desperately need. A Pew Charitable Trust report revealed that the average borrower takes out eight loans each year with an average size of $375 and pays $520 in interest.
But businesses offering these loans are always in the bad section of town with bars on every window, right? While it’s true that facilities are often positioned in lower income areas in order to attract those who need short term financial help, lower wages and higher expenses as a result of the challenged economy of recent years gave rise to more of the middle class turning to payday loans. Even well-known banks like Wells Fargo offer payday loans with an interest rate of well over 100 percent.
Consumers Can’t Afford These Loans
Those in a financial emergency can’t afford these loans. It’s done out of necessity—a desperate solution to a desperate problem but the Pew Research also found another interesting fact. According to the research:
“If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell personal possessions. “
This indicates that even those who feel desperate know that there are other options. Let’s look at a few of the more practical alternatives to payday loans.
Call your Creditor
If you’re unable to make a payment, call the creditor and ask for an extension. Providing it’s not a regularly occurring problem, they’re likely to give you an extension without charging late fees.
Sell What You Don’t Use
Do you have sellable items that you rarely or never use? List the items on eBay or Craigslist. Even if you do use those items semi-regularly, when you get back on your feet, you could probably replace some of the items using the money you didn’t pay in interest and fees.
Make a Business out of Your Hobby
You probably have a hobby or interest that could be a small business. Do you like to sew or make jewelry? Do you enjoy home improvement or repairing cars? These are all marketable hobbies. Who knows? Maybe what starts as a way to earn extra income will turn into a full time business.
Ask for Overtime
Your employer likely has scheduling holes that have to be filled and you have probably noticed that when the calls are made, there aren’t many people jumping at the chance to take on more hours. Make it known to your boss that when you can have more hours, you’ll gladly work. Showing enthusiasm might even get you a raise or a promotion.
Ask your Bank or Credit Union
If you have good credit, don’t overdraw your checking account, and can prove yourself financially responsible, your bank or credit union may give you a short-term line of credit. The interest rate will be higher than auto or home loans but it will be lower than payday loan rates. This is not the same as a payday loan offered by a bank. Read all terms before accepting the loan.
Thanks to the History Channel’s hit series, Pawn Stars, the shady, back-alley reputation that the pawn business took on has improved. Like any industry, there are ethical and unethical businesses making research key.
Pawn shops offer short-term loans in exchange for putting up an item of value as collateral. Interest rates are regulated by each state and although they’re still higher than a traditional bank loan, it’s a much better rate than a payday loan.
Cutting expenses now won’t help you pay the bills you already have but everybody, from the person with the most modest of incomes all the way to the wealthy, have unnecessary expenses in their budget.
Could you get a cheaper cellphone plan? Could you cut out cable? How about eating at home rather than at restaurants? Look closely at your expenses and make some difficult decisions. Spending some time without luxuries in order to dig out of financial hardship will give you peace of mind.
Some financial emergencies are a result of circumstances out of your control like medical bills. If that’s the case, seek out a credit counselor, talk to the creditor, or talk to state authorities about public assistance.
In most cases, there are alternatives to payday loans but if you have no other choice pay the loan back as quickly as possible to minimize fees and interest.
Photo Credit: Jesse Wagstaff