Payday loans have long been touted as a convenient way to get a few hundred dollars if you need money to tide you over until your next paycheck, but as many borrowers have come to find, these loans aren’t all they’re cracked up to be. High fees, exorbitant interest rates and a reputation for predatory lending practices are all reasons that the decision to get a payday loan is seldom a wise one, financially speaking. In fact, some states, such as Vermont and New York, have banned the practice of payday loans altogether, while other states have laws in place regulating the lenders.
Even though there are states that have outlawed or put strict limits on payday loans, the loans are still easy for almost anyone to get. Lenders that offer online payday loans can often bypass local jurisdictions, and you might not even realize that the lending is subject to any regulation. Furthermore, when you have bad credit payday loans often seem like the only recourse to getting financial assistance because many lenders don’t factor your credit score into their determination of whether or not to provide a loan. This unfortunate reality has many people turning to payday loans and getting themselves in a financial mess, when in reality there are more fiscally sound options available that you can turn to first.
If payday loans aren’t a financially responsible idea, where do you turn if you’re in a pinch and need quick cash? There are other solutions. If you take a hard look at your finances and find that you have a legitimate need for the funds now (and can’t save to make your purchase later or don’t have an emergency fund built up), then consider some of these options instead of a payday loan.
What Is a Payday Loan?
In order to understand why you want to consider payday loans only as a last resort, first take a look at what they are. A payday loan is a short-term loan, often for $500 or less. The lender offers the money for a fee, and you agree to pay back the loan within one to two weeks, or up to a month later, after your next payday. In order to get a payday loan, you usually have to give the lender direct access to your bank account or provide a postdated check for the full amount of the loan. This way, the lender can take the money from your account as soon as your next paycheck hits. Payday lenders are easy to find and are available both online and in brick-and-mortar storefronts. These stores often dot strip malls and shopping plazas with signs that promise “quick cash” or “no-credit financing.” What you might not realize is that, many times, just borrowing a few hundred dollars from these lenders can carry interest rates in the triple digits, with a repayment schedule that’s almost impossible for you to keep up with.
How Do Payday Loans Work?
On the surface, payday loans might seem like a good idea. The promise of quick cash is enticing to many people, and the idea that you can borrow just a few hundred dollars instead of $1,000 or more can make the payday loan seem like a smart move financially. Unfortunately, most people are unable to pay back the payday loan on time. If you don’t usually have several hundred dollars left over after paying all your bills and living expenses from a paycheck, there’s little reason to think that you might able to pay back a payday loan with your next check or even a month after you obtain the loan. This is where the payday loan lenders make their money. If you can’t pay, lenders roll over or extend the loan to give you extra time, but in the process they charge high fees and very interest rates. You may quickly fall into a cycle wherein you owe more and more yet are unable to repay. For this reason, payday loans have come under strict federal and state scrutiny. While there are laws in place like caps on APRs and maximum borrowing amounts, predatory lenders continue to find ways around this legislation in order to profit against unsuspecting borrowers.
Luckily, payday loans aren’t the only way to get money when you need it quickly. If you require money and can’t wait until your next payday, there are alternatives. While the following options don’t work for everyone, they may be something to consider if you’re short on cash and need money quickly.
Also known as an installment loan, a personal loan offers a lump sum of cash that you need to repay over a set amount of time. Personal loans have fixed APRs that are most often less than APRs associated with payday loans. Additionally, most personal loans provide funds that you can use for any expenses; you don’t need to define why you need the money in order to get the loan.
Personal loans are available at a wide variety of lenders such as banks and credit unions, so be sure to shop around if you’re looking at one of these loans. You can also find a variety of comparison sites online, which make it easy to shop multiple lenders and discover upfront information on interest rates, term lengths and additional fees. Most lenders have a borrowing minimum of $1000, but the repayment terms are much more favorable than payday alternatives. Term lengths are at least a year, which gives you plenty of time to budget and pay back the loan accordingly, but without the fees and penalties that can rack up when you don’t repay your payday loan in time. If you need cash quickly, you might use a third-party lender for comparison purposes, but try to score your loan directly with the lending institution because this increases the likelihood that you get your money quickly.
If you have bad credit or no credit, a personal loan may still be an option, but you might have to jump through a few hoops. Having a cosigner with established credit increases the likelihood that your loan is approved. Some lenders may ask that you put forth some collateral, such as your vehicle or home, for a secured loan. Signing for one of these loans is wise only if you know that you’re able to repay the loan according to the schedule.
Retirement Account Borrowing
While you can’t borrow against a traditional retirement account like an IRA, you may be able to borrow against a qualified employer plan like a 401k or Keogh retirement account. Many employers let you take out a loan from one of these plans at a moderate interest rate. The downside to borrowing against your own retirement is that you’re losing growth on these earnings. Additionally, some employers may require that you temporarily suspend contributions to a 401k for a certain period of time after taking the loan. This can hurt you in the long run because you’re missing out on an opportunity to fund your retirement account.
There are limits to how much you can borrow against a retirement account. The maximum allowed is the lesser of $50,000 or half of your vested account balance. Another disadvantage to borrowing against a retirement account is that you face hefty penalties and taxes if you don’t repay your loan on time. Most loans must be repaid within five years, and if you can’t repay the loan in time the amount is treated as a taxable distribution. Not only is the remaining balance subject to income tax, but you may also be subject to a 10% early distribution penalty. Borrowing from a retirement account is a fairly common way to get money when you need it, but be careful to learn all the stipulations of this option before taking advantage of it. If you aren’t aware of all the penalties and ramifications of not paying on time, you may end up spending far more than you intend on the loan while you miss out on valuable retirement savings.
A payroll advance isn’t a recourse for everyone, but it may be an option you hadn’t considered. Some companies and organizations do have a policy in place in which employees are allowed to borrow against future paychecks. These policies vary from company to company, and you may be required to pay the loan back in full on your next payday or over the course of an agreed-upon span of time. Taking a payroll advance is a bit risky in that you want to be sure to treat the agreement like you would any other loan. It also can tie you to your employer until the loan is repaid, so if you’re thinking about switching jobs, this isn’t a move you want to make. If there’s any chance you don’t think you can repay the loan in time, don’t take it out in the first place. The last thing you want is to create bad blood at work because you fall behind on payments. Not sure how to go about asking for a payroll advance? Check with your human resources department to see if it’s an option. In many cases, your boss doesn’t even have to know that you’ve borrowed money in this way, which could eliminate any tension you might be worried about.
Credit Card Cash
A credit card is a good alternative to a payday loan if you need to pay for something quickly. If you can, charge the purchase directly to the card. For instance, if you need money for an expensive car repair, don’t get a payday loan for the work; instead, just charge it on your credit card. Some cards even offer a grace period or a 0% introductory APR balance promotion for new accounts for a specified period of time. This lets you make your purchase without paying any interest if you repay it according to the card’s terms. Even if you don’t have a promotional interest rate, the interest rates on credit cards are usually less than those of payday loans, and the repayment terms are much more favorable.
If cash is what you need, consider a cash advance from the card. Credit card cash advances let you withdraw money from an ATM just like a debit card, but they do tend to carry transaction fees and higher interest rates than a regular charge. Many credit cards have limits to the amount of cash you’re allowed to take out against the card’s balance. Still, this option lets you repay over time instead of right away like a payday loan and is generally less expensive than getting a payday loan.
Friends & Family
Lastly, if you have no other recourse, consider if there are any family members or close friends who may be able to loan you the money. Of course, when you borrow from friends or family it’s even more important that you repay the money on time because you don’t want to strain or ruin any close relationships. If you choose to go this route, make sure to clearly spell out repayment terms and any interest payments in advance. A simple IOU document signed by both parties helps show your lender that you’re serious, and an actual contract may ease any discomfort on the part of the family member who decides to loan you the cash.
Before you approach any potential lender for quick cash, take a good look at your finances and ask yourself if borrowing the money is really essential for your lifestyle. If you need the funds to pay an unexpected medical bill or to cover costly car repairs, then pursuing one of the above sources may be a good idea; if you simply want to fund your vacation or are looking at buying that new TV, put off the purchase for a few months while you save the money instead of borrowing it. As long as you enter into an agreement with a clear budget and repayment schedule in mind, you can avoid the costly and often ill-advised choice of payday loan borrowing.