When you examine the numbers, it’s difficult to deny that payday loans are detrimental to your finances. Payday loans affect real people with real families who are unable to make ends meet. So, out of desperation, they often turn to what is probably the most customer-unfriendly financial product on the market.
The problem is the interest rate; upwards of 500%. 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.
While it’s true that facilities are often positioned in lower income areas in order to attract those who need short term financial help, more of the middle class is turning to payday loans. Even well-known banks like Wells Fargo offer payday loans with an interest rate of well over 100%.
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:
If faced with a cash shortfall and payday loans were unavailable, 81% 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
List sellable items that you rarely or never use 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
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. Just make sure you read all terms before accepting the loan.
Try a Pawn Shop
Thanks to the History Channels 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, so do your research.
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.
Cut Expenses
Cutting expenses now wont help you pay the bills you already have — but everybody has unnecessary expenses in their budget.
Could you get a cheaper cellphone plan? Could you reduce your cable bill — or cut it out completely? How about eating at home rather than at restaurants? Spending some time without luxuries in order to dig out of financial hardship will give you peace of mind.
Seek Help
Some financial emergencies are a result of circumstances beyond your control. 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 much better alternatives to payday loans — but if you have no other choice, it’s important that you pay the loan back as quickly as possible to minimize fees and interest.
Photo Credit: Jesse Wagstaff
I have credit cards and a HELOC that I could use but 2 years ago I had to take a tax penalty when I raided my RRSP (registered retirement savings plan) when I needed a new roof.
I have an emergency fund now. Much less expensive
It doesn’t really matter WHY the need arose–if you need a payday loan, it means you need, at most, two weeks of your pay a little early. That size of an emergency should be able to be covered by anyone’s emergency fund. Obviously, if you’re looking for a payday loan, you don’t have that fund, but it should be #1 priority as soon as the payday loan is repaid, so this never happens again. And that’s where the cutting back in other areas comes into play….
If payday loans were not available 81% would use other means to cover their shortfall. Why not do those things first? Why not, as you suggest, cut back, sell stuff, and negotiate first?
For many folks, in a desperate situation, they would get the short-term loans you mentioned. It seems that payday loans are the easiest and so are the more popular.
How about peer to peer lending? That seems like a good alternative to me, but I’m not sure how fast you’ll get the money though. I’d probably just borrow from relatives first.
Two weeks or more, and there are upfront fees.
Hobbies often have unprecedented monetization options, when we think outside of the box. Great tips!
How about an alternative that says you will never use them again.
I think the term ‘payday loan’ legitimises this unsavoury business. Many people who use these loans don’t have work and use the loans out of desperation, then being forced into desperate circumstances to try and repay them. The loan firms are aware of their demographic.
The term ‘payday’, to me, suggests a nice little loan to keep you ticking over till your salary arrives. It minimises, I think, the severity of the consequences arising from getting into the payday loan cycle.
The actual purpose of Payday loan is to recover the unexpected expenses in the bad times.. This is very helpful for the people who need instant financial help. And generally, it is granted to the people who are working so that they can repay the loan out of their salaries.
So this is a great financial help in bad times…
Payday loans are an evil, never ending cycle of misery for those that have to rely on them. If your borrowing against your next paycheck to survive, what do you think happens when you pay off that last loan. You’ll be short again and standing in line for another one. It’s a bit pathetic and abusive if you ask me.
I used to work in customer service for a large 401k recordkeeper. I feel the same thing happens with 401k loans. People rack up debt, take a 401k loan which gets paid out of your paycheck. You have less paycheck now, so you rack up more debt, etc. It’s not quite as expensive interest-wise, but it’s still a vicious cycle.
I think the ideal would be either to have a higher income, a bigger emergency fund, or to have the full range of banking services available to people with more income or wealth.
There may be ways that society — either through charity, corporate responsibility, or government action — could fix it, but they haven’t. Obviously, payday loans aren’t the best way to fill the need, but it clearly fills a need that traditional finance doesn’t. They’re a symptom of a disease, not a cause of it…
Payday loans do fill a void in the market. I would think and hope that banks could figure out a way to help fill that void. There is a huge market for it, or else it would not be such a booming industry. There are alternatives to it, but unless the rest of the financial world comes around and starts competing, it is not going to get better.
This is great advice, thanks for sharing.
This is the reason I stay away from getting a loan. Lenpenzo, I agree with all your alternatives! I’d definitely work overtime or look for side hustles instead of getting a loan.
I was searching for loan to pay for my husband surgery and sort out my bills & debts, then I saw comments about one particular loan company that I won’t mention here. I doubted thus but decided to give it a try by contacting there website. They responded with their loan terms and conditions on how it works. i was assured that the loan $50,000 instant will be credited into my account so I applied for a loan & paid the processing fee to obtain the loan. 48 hrs later, I was shock to see that my account has been credited} I got my mortgage and I paid for my husband surgery and my daughter fees and thank God today he is good and he can walk now and the burden is no longer so much on me more and we can feed well and my family is happy today.