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Payday Loan Alternatives: Finding Low-Cost Loans
It is said that the average APR of payday loans in the U.S. is at 400%. Are there any other alternatives to expensive payday loans?
No one wants to experience any shortage in cash, but when the sudden need arrives, a payday loan can provide quick cash. But is a payday loan the only way to get relief from a short-term financial emergency?
Borrowers can easily get fast cash to tide them over to the next payday, but that convenience comes with a high price. The Center for Responsible Lending reports that the U.S. payday loans have an average APR of 391%.
With all the convenience and relief that payday cash advances bring, these loan products pose a bigger risk to your financial health. Aside from the exorbitant interest rates that go with payday loans, failing to repay the debt on your next payday will result in expensive loan renewals. What happens when you renew your loan?
- Renewing the loan for another cycle results in additional fees
- Renewing the loan more than once will pile up the fees and penalties, eventually leading to an unending debt cycle. The fees that accumulate will end up higher than the principal amount
Payday loans are not the sole option when you are strapped for cash. Before taking out a payday loan to remedy your short-term financial drought, take a look at the
7 alternatives to payday loans:
Before looking elsewhere, try to find out whether your company offers employees a paycheck advance. A payday advance may be the solution to a short-term cash shortage. Take note that not all employers offer paycheck advances. Also, remember that the fees and interest rates of a paycheck advance will vary from company to company. A paycheck advance is still considered a loan that you must pay back on time unless it is automatically deducted from your wages.
- Many people dislike the thought of borrowing from a traditional financial institution like a bank or credit union because of the eligibility and requirements. However, a bank or traditional lender may be able to provide a lower-cost loan compared to payday loans.
If you prefer not to borrow from the local bank due to your credit rating, an online lender is your next best option. An online loan provider can give you an idea of how much your loan will cost without the need to put your credit history under hard verification. The main difference between a payday loan and a personal loan is the turnaround time. An online personal loan may not be processed on a same-day basis as a payday loan, but you will be able to receive the funds in a few days once the lender approves your request.
One of the biggest problems that Americans face is credit card debt. If you are having difficulty making your monthly payments, you should reach out to the credit card company and find out if it is possible to work out a payment plan. Some credit card institutions provide cardholders the opportunity to take advantage of a hardship program. The program will suspend monthly payments or reduce the payments that you have to make on a temporary basis. In other cases, you may be able to request lower interest rates for your outstanding balance to make monthly payments easier for you to manage.
For people with existing loans with payments that have become unmanageable, you can try reaching out to the loan provider for an extension of your due date. The lender may accommodate your request if you have been managing your loan payments really well in the past. Being honest about your situation may help you get better terms for your existing loan.
Credit Card Cash Advance
Despite being very convenient, credit card advances are one of the most expensive loans that you can get. Credit cards have a cash advance feature wherein the cardholder simply needs to go to the nearest ATM to get cash. There is no need to fill up any forms or wait for the lender’s decision. The cash advance amount is taken against your available balance and is considered a loan, not a credit card purchase. Card issuers charge around 5% of the amount taken from the credit card as a fee.
To benefit from a credit card cash advance is to pay off the amount you took as soon as possible. Credit card outstanding balances become unmanageable once the interest and finance charges pile up. Leaving your credit card balance unsettled will result in accrued interest month over month until you are left with debt so huge that it becomes difficult to pay off.
If you are not willing to take out a loan from the bank or from an online lender, why not use your 401(k) as a source of funds when you have a sudden financial crisis? Many people will say that it’s not wise to take out money from your 401(k), but if you’re in a financial rut, that’s one of the best solutions. And you don’t need the approval of your boss to get the money that you need.
One of the advantages of taking out a 401(k) loan is that you don’t pay any taxes or fees to borrow money. You still need to repay the loan in full or by installment in case you leave your current workplace. There’s no need to worry about credit checks since you are taking our a loan from your own money. The best way to handle a 401(k) loan is to pay back the money you borrowed within a year. There are also some rules that you need to follow when you take out a 401(k) loan, such as only being allowed to contribute to your 401(k) loan after the debt is repaid. Failing to return the money to your 401(k) may adversely affect the growth of your retirement funds.
Credit Union Loans
You should also consider a credit union loan when you are struggling to keep your financial obligations but do not want to take out a payday loan. Credit unions offer short-term loans as an alternative to high-cost payday loans.
The amount you can borrow from a credit union may be as small as $200 up to $1,000. The loan should be repaid in a month or up to 6 months. Application fees are very reasonable, usually around $20. However, in order to take out a credit union loan, you must be a member of the said organization for at least 30 days.
Not all credit union loans are cheap so it is best to understand the applicable fees and interest rates before applying for one. Some credit unions charge a minimum of 15% of the loan amount while others may charge as much as 30% of the amount borrowed.
In times of need, you may want to consider some of your personal connections as a source of financial aid. By personal connections, we mean a trusted friend or close family member who may be willing to help you out.
Seeking the financial help of family and friends may be uncomfortable, but it is a good option if you are avoiding high-cost loans that may eventually lead to an unending cycle of debt. Remember that when you take out a loan from a personal connection, you should pay back the amount as agreed upon. Failing to repay your debt to a friend or relative may destroy your relationship with them. Treat the financial aid offered by a friend or family member the same way as you would handle a traditional bank loan or an online loan.