Have you ever been in a budget crunch and needed money fast? Couldn’t wait for your paycheck to come in? Chances are you may have stumbled across what’s called a payday loan. A payday loan is pretty self explanatory. Otherwise known as a payday advance, salary loan, payroll loan, etc., payday loans are like getting your paycheck early. Of course, you’ll just have to pay it back once your actual paycheck comes in. These “cash advances” are meant to be short term, and are associated with high interest rates, along with equally high risk.
These types of loans have been involved in their fair share of controversy. From Australia, to the UK, to North America, low income communities have had their money drained by salary loans, and have fallen victim to some of the highest defaulting rates. This has lead to several laws being created restricting APR (Annual Percentage Rates) and where they can be offered. However… are they really all that bad?
*Disclaimer: Keep in mind that I may receive commissions when you click my links and make purchases. However, this does not impact my reviews and thoughts. I try my best to keep things fair and balanced, in order to help you make the best choice for you.
High Interest Rates = High Risk
Payday loans are the face of predatory lending, and for one major reason. The average interest rate is 391%! Which is if you pay it back in the two weeks that you’re given. This makes for an extremely high risk taking out one of these loans. Especially for lower income individuals and families, all of who are more prone to taking out a payday advance. According to the Consumer Financial Protection Bureau, 80% don’t get paid back on time. Those who don’t pay on time get slapped with an increase up to 521% on their interest rates, and will continue to climb until the debt is paid.
A loan defaults after a borrower fails to pay back their debt in time in accordance to the agreement made with their debtor. Punishments can be severe with defaults, and with the default rates around 6%, payday loans can be tremendously bad for your personal finances. With payday loans being considered as small unsecured personal loans, the punishment for defaulting would most likely be wage garnishment. Wage garnishment is when a court orders your employer to withhold a certain amount of money from your paycheck and send it to your creditor until your debt is resolved. This can lead to a circle of debt. With less money in your paycheck, you might not be able to pay off other debts. Consider an auto loan. If you can no longer make your payments on your car, it may get repossessed. The circle of debt will just get larger from there.
Lenders in this industry often understate their profits. Many say the average profitability for payday lenders is around 3.57%. In reality they make around 34% profit per investment. They make money off of those who cannot pay their loan back in full, and must keep renewing. Quickly, those fees will add up to more than what was owed. Even if most borrowers are low income and have poor credit history, this doesn’t make for any large losses or risks for lenders. So really, the payday loan industry is shrouded with misinformation.
Payday Loan Alternatives
There are plenty of alternatives you can use to avoid taking out a payday loan. If you are ever experiencing an emergency and are tight on cash, these payday loan alternatives will be significantly better for your credit and personal finances.
Loan from Credit Union
Credit unions offer lower interest alternatives to payday loans. Many, although not all, also offer payday alternatives. These are smaller loans usually up to $1,000, and the interest rates usually cap at 28%. You are also given a few months (depending on the credit union) rather than 2 weeks for a payday loan. Typically all that is needed for these loans is a good standing with that credit union. A few days will be needed to approve the loan.
Apply for a Bad-Credit Loan
Most people who end up taking out a payday loan have a bad credit score. If that is you, apply for a bad-credit loan instead! A bad-credit loan is for those who have a FICO Credit Score of less than 690. Do keep in mind that you still have to make your payments on time. If you miss a payment then it will still effect your credit score. Bad-credit lenders can be found online and usually deposit the money into your account the same day or the next business day.
Bonus: Improving Credit
If you would rather not deal with your bad credit than my unofficial advise would be to hire a credit professional that can help you get your credit score back on track. Credit Assistance Network is a great way to get your credit back up. They offer credit repair, counseling, and general help. In addition, they also offer services in regards to credit theft!
Borrowing from a Friend or Family Member
If all else fails, don’t forget to ask if your friends or family can help you out with any financial hardships. Often, family members and friends don’t charge interest or fees on what you owe them, so there is essentially no way to get caught in a circle of debt with this strategy. The amount of time it takes for you to get the money depends on how fast your family member or friend is.
Adding Another Income Stream
Adding another income stream can be easy and is a great way to add additional funds into your budget. You can start your own business, get a side job, etc. I am a big supporter of affiliate marketing, and Fiverr Affiliates is one of my favorites. I have more information on a previous post which can be found here.
The main takeaway from all this information is to stay away from payday loans if you want to avoid a high risk of debt. There are too many low income individuals and families who have fallen for the predatory ways of the payday industry, don’t become another. With this information, I challenge you to stay away from payday loans, and grow your credit score rather than destroy it! As always, if you like my content and want to read more, subscribe to my newsletter to stay up to date on new content.