Imagine (or maybe you don’t have to imagine) you live paycheck to paycheck. Suddenly, an unexpected expense arises. You can’t pay for that and still make rent. Who do you turn to? Luckily—or unluckily—an entire industry exists to help you with that need: payday loans.
A payday loan is intended to help you survive just till your next paycheck. A credit check isn’t usually required, so they’re ideal for people with bad credit. But they often begin a debt cycle you will struggle for years to escape.
What Is a Payday Loan?
A payday loan is a short-term unsecured loan, meaning you don’t need to mortgage your house or any other property to get it. Usually the term is for about two weeks, from when you need the money till your next paycheck comes in. They’re billed as a solution to cashflow problems for people without savings.
Usually, you won’t have to remember to pay them back. Instead, they take a post-dated check which they can deposit on your next payday. The second your paycheck hits, they’ll take the money back out, plus a fee for their trouble which takes the place of a normal interest rate.
If you can’t pay the money back right away, you may have the option to rollover the loan into a new payday loan. That hits you with another fee, plus you’re still in debt for the original amount.
What’s the Catch?
Naturally, no one is in this business out of the goodness of their heart. Other loans are safer bets for lenders, either because lenders choose borrowers with good credit, or because the loan is secured by a house, car, or other property they can repossess. Payday loans are risky for the lender, so the terms are much, much worse.
First off, the fees they charge are far higher than interest on a regular loan. A fee of, for example, $75 on a $500 loan for two weeks, equals over 300% annually. Even the worst credit card would never charge you so much.
Second, your paycheck-to-paycheck life is unlikely to change much in two weeks. If you spend your whole paycheck paying back the payday loan, where will you get the money for your expenses next month? Hopefully not another payday loan!
And what happens if you fall behind on the fees for these payday loans? Hurt credit? Collections? Worse than that—the lender can and will take you to court to get their money back.
Alternatives to Payday Loans
For many people, there are alternatives they can try before turning to this dangerous option.
Borrowing from friends or family:
Yes, there is shame involved. And you certainly shouldn’t do it if you think you won’t be able to repay. But if you really just need a short bridge of two weeks, many people will agree to help—once.
A short-term personal loan
Banks and credit unions offer short-term personal loans, though you will have to pass a credit check. With poor credit, you will pay more interest—though still significantly less than a payday loan would charge. If your credit is too bad, you might be denied outright.
If you have or qualify for a credit card, this is always a better option than a payday loan. You pay no interest if you pay the balance within thirty days. And even if you can’t, the interest beats what a payday loan will charge. Just make sure to get the balance down as quickly as possible, because once the card is maxed out, it won’t be able to help you out of the next tight spot.
An advance from your employer
Some employers will give you some of your paycheck early. If you don’t already know their policies, human resources can tell you.
Making money quickly
You can sell items like video game consoles, furniture, or designer clothing, if you have them. Alternatively, short term side gigs may help you rustle up the money fast.
Ask creditors for leniency
Some of your creditors might cut you a little slack if you call them first. They’ll be much more difficult to bargain with after you’re already late.
If you can get food from a food bank or apply for rent assistance, you may be able to free up the cash to pay for your emergency. Community organizations and churches can often help you right away.
Of course, the best way to avoid these predatory loans in the long term is to improve your financial situation. Having a budget can help you build up a small savings cushion. While experts recommend keeping a few months’ expenses on hand, even $500 can make a huge difference in emergencies.
Improve your credit by paying down maxed-off credit cards and keeping on top of bills. You can also build credit with a secured credit card, which allows you to build credit history without risking default.
You Need Help
If your financial situation is bad enough to be considering a payday loan, you definitely could use a hand. A financial advisor can help you see past the current mess into the secure financial future you want. Contact us to set up your free consultation.