By Aaron Crowe
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A typical two-week payday loan with a fee of $15 for every $100 borrowed equates to an annual percentage rate of almost 400%, according to a federal agency that regulates such loans. Credit card APRs, by comparison, range from 12% to 30%.
That’s an incredibly high interest rate to pay on a loan that’s meant to be for short-term emergencies, but which most people renew within two weeks because they again need a bridge to their next paycheck.
Getting into a debt trap with a payday loan isn’t the only alternative when you’re hurting for a loan. Here are some smarter alternatives to payday loans:
“Credit Unions offer alternative lending options that can help individuals facing financial hardships stay away from predatory lenders such as payday lenders,” says Vanessa Ortega, program manager at JetStream Federal Credit Union in Miami Lakes, Fla.
Look for a credit union that is certified as a “community development institution ” to help you stay away from predatory lenders and offer help on how to set a budget, Ortega says.
The credit union she works for offers what it calls “no credit check loans,” which helps members get quick access to cash without a credit check, and at low rates. The loans can also help a borrower’s credit score, she says.
The Credit Union National Association has a search tool to find a credit union in your area. Many offer short-term loans.
Credit card cash advance
Getting a cash advance from your credit card is a short-term solution that should only be used if you can pay it off in full by the due date. You’ll likely be charged close to 30% interest on a cash advance loan, but it’s better than the typical 400% APR from payday loans.
Loans from friends or family
While a bank is unlikely to have an emotional investment in loaning you money, a friend or relative
may be a bit more involved in the loan and it could create a bad relationship if you don’t repay on time. Still, it could be a better option than a payday loan if you’re comfortable with it.
Daniel Lieser, co-founder of TrustLeaf. which helps with personal loans for small businesses by putting them in a legal document, says he recently borrowed money for a security deposit at a new apartment from a family member before he could get his old $2,800 security deposit back.
“I’ve always used loans from immediate family members, even though it usually feels awkward,” Lieser says. “I made it better by always paying back on time and later giving them a $25 gift certificate as a thank you, so they’ll be willing to lend me money again.”
Set a budget and avoid payday loans
Doing this may not help your immediate emergency for cash, but setting a budget and sticking to it can alleviate your need for payday loans and solved a fundamental problem.
“The fundamental problem is that your expenses are more than your income,” says Joe Geiger, author of a book on business principles. “Until this fundamental problem is solved you will always be looking for a short term fix in the form of payday loans or other short term solution.”
List your monthly fixed expenses, such as food, fuel, rent. If you’re monthly income doesn’t meet those expenses, something will have to be cut. Proposed expenses shouldn’t be more than 90% of income, with a 10% cushion to cover the unexpected and dig yourself out of a financial hole, Geiger says.
“Prioritize your expenses starting with food,” he says. “How can I pay less for the necessary expenses? Cut all restaurants. Cut all unnecessary fixed expenses. You can’t live without food, but you can live without a iPhone.”
What methods do you use to avoid payday loans? Leave your ideas in our comment section below.
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Category: Payday loans