Payday loans online have become synonymous with predatory lending for one reason: the average interest rate on a payday loan is 391 percent, with some loans charging as much as 600 percent!
You may believe that taking out a payday loan is your only option for dealing with an unexpected bill or even paying off another debt. Still, the truth is that taking out a payday loan will end up costing you more money than the problem you’re trying to solve. In the long run, it will cost you more money than any late fees or bounced check fees you are trying to avoid.
Alternatives to Payday Loans
- Paycheck advance: Many employers provide their employees with the opportunity to receive the money they have earned before their next paycheck is due. Example: If an employee has worked for the company for seven days and the employee’s next scheduled paycheck is not expected for another five days, the company may choose to pay them for the seven days that have passed. It is not a loan in the traditional sense. It will be deducted from your account when your next paycheck arrives.
- Credit Counseling: Nonprofit credit counselling agencies, such as InCharge Debt Solutions, provide free advice on creating a manageable monthly budget and begin to pay down your debts more quickly. InCharge credit counsellors can point you in the direction of resources in your community that assist with food, clothing, rent, and utility bills to people experiencing a financial crisis.
- Debt management plans: Nonprofit credit counselling organisations such as InCharge, for a monthly fee, provide a service to help people reduce their credit card debt through debt management plans. The creditor offers the agency a lower interest rate, and you and the agency can decide whether or not to accept it. The agency pays creditors, and you make one monthly payment to the agency, which frees up money to pay your bills and pay down your debt. The plan will pay off the debt in three to five years.
- P2P Lending: If you’re still having trouble finding a source of funds, consider going online and checking out the peer-to-peer lending sites available. Although the interest rates could be close to 35 percent, they are still significantly lower than the 6 percent rate that those with excellent credit receive. However, 35 percent is still considerably lower than the 391 percent charged by a payday lender.
Payday loans are targeted at military personnel and low-income individuals.
Individuals in desperate economic situations, such as low-income, minority families, military personnel and anyone else with limited credit options, are preyed upon by payday lenders.
- According to the Consumer Financial Protection Bureau, 80 percent of payday loans are rolled over, and 20 percent are defaulted, which appears on your credit report for seven years and virtually eliminates your ability to obtain credit in the future. Another penalty that consumers frequently incur due to payday loans is nonsufficient funds (bounced-check) fees from their financial institution.
