A payday lender always has the upper hand with customers who take out loans. If there are insufficient funds in the borrower’s checking account—which is often the case, since a lack of money is usually the reason for getting the payday loan in the first place—then putting a postdated check through has the possibility of resulting in a bounced check that gives the borrower high bank penalty fees. The tendency is for the borrower to rollover the loan.
That leads to another characteristic of a payday loan life, which is that the borrower gets into a cycle of obtaining a loan to pay the last loan off, or asking a loan to rollover. Each rollover adds large finance fees to the loan and exponentially increases the payday loan’s APR. It’s a progression that never ends. With mounting finance fees, it can lead to financial ruin.
Payday lenders are often less than honest. Most payday lenders are required to report APR amounts, but the fact is that only 37 percent of payday lenders actually do so. Plus, when you realize that almost any other type of money lending is done with a lower interest rate, it makes sense to seek payday loans in only the most dire of circumstances and only if the borrower has a definite method of paying the loan off by the due date. Better yet, it might be advantageous to develop ways of avoiding payday loans altogether.
Ideas That Are Better Than Payday Loans
One of the best ways to defeat the need for a payday loan is to develop a savings plan. Open a savings account in your bank and deposit a certain amount of money, say $10, out of each paycheck into your savings. An initial goal might be to build your savings account to $500. Most credit counselors advise their clients to build an emergency fund equal to six months of living expenses.
Some employers will even allow for direct deposit from a paycheck into a savings plan. Over several paychecks, your savings account grows. Then, on the day that you accidently run across a box of nails that fell out of a builder’s supply truck which blows all four tires on your car, you have the $500 required to purchase a complete set of rubber for your automobile without trying to get a payday loan.
Another practice that can help in bypassing payday loans is to operate on a balanced household budget. Keep all of your receipts made for expenditures for a month and categorize them. Collect together a pile for food receipts, both from the grocery store and money spent eating out at restaurants. Collect up receipts for money spent on transportation, such as bus and taxi fares, or gasoline, oil and automobile upkeep. Figure up your utilities—electricity, water, sewer and garbage fees. Don’t forget the cost for the roof over your head, whether it’s for rent or a house mortgage.
Write your categorized expenses down on a sheet of paper. On that same page, list your monthly income. Subtract total expenses from total income. If you get a negative number, that’s bad. Decide what you can afford to eliminate so that you get a positive number. Then you can start keeping more of your money for that savings account that was mentioned above. Now you’re running on a balanced budget and don’t require a payday loan for emergencies.
Other Alternatives to Payday Loans
Creditors to whom you owe money are businesses or government entities operated by humans, just like you. They have bills, too. Sometimes all you need to do is talk to them. Difficulties in paying bills can sometimes be discussed with solutions developed that cost less than payday loans. You might even have to pay a penalty for not paying a bill on time. But, a $10 penalty is less to pay than an ongoing payday bill charging more a 400 percent APR.
Along those same lines, often you can ask a creditor for more time to come up with a payment for a bill. Check to see if non-interest bills can be paid at another time. In some cases, interest might be applied to your bill, but five to 15 percent interest added to the bill is peanuts, compared to 400 percent or higher APR charged by payday loan “stores.”
Credit cards are used by consumers who don’t have immediate cash available to pay bills. Payday lending companies sprang into existence because of consumers who could not obtain credit cards. The main basis for obtaining a credit card is a credit report.
A point that many people don’t realize is that one in four of all credit reports are in error. Get a copy of your credit report. It might have errors in it. Find and correct an error and you might be well on your way to a credit card and cash advance privileges enjoyed by credit card carriers.
If you do own a credit card, don’t even think twice about looking at payday loans. Take a cash advance through your credit card, or better yet, charge the bill. Obtaining a cash advance through a credit card is not cheap. Charges run between 35 and 50 percent. However, considering an APR of 400 percent associated with payday loans, credit card cash advances are quite inexpensive.
Some employers offer cash advances with little or no interest rate. Check to see if your employer offers such an employment benefit. Taking a cash advance out through your employer is safer than dealing with a stranger in a payday loan business or a non-entity over the Internet.
Plus, both you and your employer, in this case, your lender, know one another. There’s a better sense of trust involved with both parties.
Check with your bank to determine if you’re eligible for bank overdraft protection. The fees involved with most overdraft plans are far less expensive than the recurring fees and the steep APR of payday loans.
Another option is to ask your bank if you can get a small line of credit through the financial institution. Not only do you help to build your credit rating with a line of credit, but you’re dealing with the same entity that you place the trust of your money into. Your neighborhood bank runs under specific rules and regulations that keep your checking account safe, which makes for an honest and equitable method for borrowing money. It’s a less expensive and safer environment, compared to getting a payday loan.
Do you have a relative who can loan you money? There might be some “crow” you’ll need to eat when asking a relative for a loan, but next of kin might be forgiving enough to waive charging interest fees, or require only low interest in return for loaning you money.
Another option is to apply for a traditional small loan through a bank or a savings and loan establishment. Again, financial rules and regulations dictate a more reasonable interest rate than the expensive rates traditionally charged by payday loan companies.
Several full-time jobs today offer the ability for employers to place pre-tax earnings into a 401(k) savings plan. Employees can take money out of a 401(k) plan. It’s not an advisable move, because if money is removed from a 401(k) plan prior to retirement age, the owner of the 401(k) plan pays the federal government a 20 percent fee. That 20 percent is still much lower than the 400 percent APR paid to get a payday loan.
A better idea involving 401(k) plans is to borrow money from your plan. Again, it’s not a recommended step, because you lose compounded interest earnings that build through your 401(k) plan's investment power. Still, your loan can be paid back through regular paycheck allotments and a withdrawal penalty is not assessed for early withdrawal from your 401(k) plan.
Credit counseling or debt counseling is also available from non-profit organizations that help customers with budgeting ideas and contacting creditors to work out manageable bill paying options. Through credit counseling, money can be freed up to pay outstanding debt, which eliminates the need for payday loans.
Ultimately, are there expenses that can be cut? Is the expense you’re about to incur really an emergency? Maybe you can take public transportation to and from work, instead of driving a vehicle. Perhaps you just can’t afford cable television and listening to a “free” radio will have to suffice. Is another video game really necessary? People have survived without paying for Internet. Most public libraries offer Internet for free. Contrary to what some might think, a smart phone isn’t a necessity. People live with an old-fashioned wired phone or no telephone at all. People don’t die without a “drink with the boys,” or a “girl’s night out.” Take an honest look at the budget and often the answer is yes.
Sometimes extreme measures must be taken. There are stories of those who live out of their car for a while in order to get out of debt. When expenses are cut, there’s more money to pay the bills and potentially more money to place in a savings account for emergencies. And, that “rainy day” fund means the payday loan business makes its money from someone else and not you. It also puts you on the road to economic independence.
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