Payday loans offer instant cash to consumers. There is no credit check, and the amount is usually credited to your checking account within 24 hours. Due to their easy accessibility, payday loans are also called fast cash.
Payday loans are incredibly pricey owing to their high-interest rates. Still, around 12 million Americans borrow payday loans every year, and 80% of the loans are refinanced after 14 days. The compounding interest rates increase the outstanding balance quickly, and the borrowers get engulfed in a vicious cycle of debt.
Several states have passed laws to cap the interest rate, and some have even prohibited payday loans. Still, tribal lenders issue loans, and cash-strapped borrowers get entrapped into debt.
This post will discuss what payday loans are for, the problem with payday loans, tips to avoid high-interest payday loans, and what to do with the existing ones.
What Are Payday Loans For?
Payday loans are short-term loans for people with a bad credit score. These loans are usually used for fulfilling short-term financial needs. For instance, a sudden car repair or an unexpected medical bill.
What’s the Problem With Payday Loans?
There are two problems with payday loans. The first problem is the loan amount. The maximum amount you can receive is $500 or less, which is not enough to cover large expenses.
The second problem is the interest rate. While several states have rules and regulations regarding loan terms and interests, you can still expect to pay 500% or more in interest depending on the APR.
Borrowers are usually required to pay off the loan within 14 days. In most cases, borrowers cannot pay such a sky-high interest rate. Hence they borrow another payday to pay off the previous loan. Each time they roll over their loan, the interest rate and fees pile up. It becomes a formidable challenge to get out of payday loan debt.
The biggest problem is when borrowers have to deal with illegal payday loan companies. These companies withdraw money from the bank accounts on each payday. At the time of borrowing loans, consumers give ACH authorization to lenders by which they can withdraw money from their bank accounts, and they take full advantage of it every month. They continue to withdraw money from the savings accounts until borrowers don’t have any money.
Borrowers feel helpless and frustrated. But they can’t do anything. There are several instances where companies have withdrawn more than $8000 on a $500 payday loan. Repeated pleadings to lenders don’t help. Lenders are ruthless when it comes to money.
What Can I Use Instead of Payday Loans? 5 Tips to Avoid Fast Cash
Payday loans should always be your last option. In fact, you should apply for a payday loan only when you have exhausted all other options.
Here are a few other options that you can try out instead of payday loans.
1. Explore local resources
Explore non-profit organizations in your locality that help to resolve short-term financial issues. If you don’t have money to buy groceries, get in touch with the local food pantry. You can also browse online or call 911 to know about the local services that can help you out.
2. Take out a personal loan
Credit Unions offer personal loans to people with fair and bad credit. The best part is that they charge lower interest rates than payday loans. You may receive loans of up to $800 from credit unions and online lenders. The interest rates are usually below 20%.
Some banks and other online lenders offer personal loans depending on your credit score. The loan amount usually varies between $800 and $30,000. The interest rates are generally around 36%. Still, that is lower than payday loans.
3. Ask your friends to help you out
If you need a small amount, you can ask your friends and family members to give you a short-term loan. Even if you are not comfortable discussing money matters with your friends, you may have to do it to avoid high-interest loans. To avoid ruining your relationship with your family members, prepare a loan agreement.
Read the loan agreement and see if you can fulfill the terms and conditions. Save money and stick to the repayment terms. It will help you to maintain good relations with your loved ones.
4. Use your credit card
If you have available credit, you may think about credit cash advance. But make sure you borrow an amount you can afford to pay. Several credit card companies charge high interest on cash advances. So, it’s best to know how much you have to pay.
5. Speak to the HR department
Before applying for a loan elsewhere, discuss your problems with the human resource department of your company. Some organizations offer short-term loans at a 0% interest rate to their employees. Large organizations may even have better financial resources. Explore those resources first before knocking on the door of the financial institutions.
What Can I Do if I Already Have Payday Loans?
The best option is to repay the loan with your next paycheck. The sooner you get rid of this loan, the better.
Use Debt Payoff Planner
If you have unpaid payday loans, use Debt Payoff Planner to get a step-by-step payment plan with a clear payoff date. The Debt Payoff Planner’s payment tracker helps you see your progress, stay motivated to complete the payment plan, and visualize the debt-free date. You will also get several resources to boost your income, reduce expenses and debts, and improve your budgeting. The in-depth analysis of all the options helps you make the best decision and accelerate your debt repayment process. The best part is Debt Payoff Planner has a free version, and you don’t have to spend extra money.
Opt for the extended payment plan
Another option is to opt for the extended payment plan (EPP). Here you can pay the loan in 4 equal installments without any additional interests. The outstanding amount is also reduced, which helps you get rid of debt comfortably. However, keep in mind that only CFSA members can give you this option.
Loan consolidation
The third option is to consolidate your payday loan debts into a single monthly payment plan. You can enroll with legitimate payday loan consolidation companies for this.
Settle your loans
The fourth option is to settle payday loans where you pay a portion of the total accrued amount. You have two options. Either you can negotiate with lenders or hire a professional debt relief company to settle your payday loans. But this option only works when your financial situation is terrible. Moreover, your credit score will drop as you are not paying the total amount. You also have to pay tax if the forgiven amount is more than $600.
These four options work for legitimate payday loan companies. As we have already discussed, some states have banned payday loans. Moreover, tribal lenders issue payday loans to borrowers at exorbitant rates even though they don’t have the license to operate in the country.
Since these lenders are illegal, the loan agreements are also void. You are not required to pay interest on these loans. You have to pay only the principal amount, and that’s all.
