Payday loans can be a great way to provide some much needed cash to help you make it to your next payday. These companies basically offer you a cash advance based on your need. They provide a beneficial service for those who find themselves in a financial pinch and need something quick. A payday loan can be obtained and used for things like paying a utility to avoid a cutoff, to keep up a timely payment like for a car, for emergency car repairs, or if you have an emergency and need to make an unexpected trip. These are some of the primary reasons people take out a payday loan. They can be very useful in certain situations; but there may also be other viable solutions for many individuals.
Why Payday Loans Should be Avoided if Possible
Payday loans are a solution when someone is in a tight spot with their finances. These are legitimate companies offering a financial service to someone who needs it. But there are a few reasons why you want to look for other alternatives before you head down to sign on the dotted line. Here are the top three reasons it is advisable to avoid a payday loan and find other solutions when possible:
- Payday loans are very expensive.
- It’s easy for it to become a cyclical process that is difficult to escape.
- You have to give the payday loan company access to your bank account.
These are some good reasons to search out alternative means for obtaining extra cash or emergency cash when needed. There are many other alternatives that do not trap you in a debt cycle and are less expensive than a payday loan.
How to Avoid Payday Loans?
Even though payday loans are a viable option when you are in a pinch, there are some other alternatives that are worth your consideration. If you are aware of the variety of options you have available then you can make an educated decision about which one to pursue and which one is best for your present situation. You are certainly capable of making the best choice when you are armed with the right information. Then if the situation arises and you feel a payday loan is the best option, just make sure you understand all the terms from the lending facility before you take out the loan. No matter what option you choose, make it your first priority to pay the loan back as quickly as possible.
Option 1 – Take out a Small Short-term Loan with your Bank
Other loan options are available through lending institutions. In some instances your bank can offer a small loan with a variety of pay back options. Sometimes it’s a lump sum payment or it is paid back in monthly installments. In many cases there is a 90 day repayment period and you don’t have to have any collateral. There are options if you want to renew the loan a time or two. However, if you have to renew short term loans too many times they are not really helping you out very much.
Option 2 – Negotiate with Creditors
In some instances you may consider taking out a payday loan for a quick fix to make a payment to other creditors. Even though this might seem like a good idea, it can cost you more in the long run. As an alternative to taking out a payday loan and creating more debt, simply talk directly to your creditors about making payment arrangements. Many times they will make negotiations for partial payments or work out an alternative payment plan for consumers. It might be that they can refinance so that the bill is paid off but taking a longer amount of time.
Option 3 – Employer Advances
Some employers will grant an advance to their employees in some cases. It is an advance on what you are going to make but it is not a loan which means there is no interest being charged. You will have to make adjustments as you realize your next check is going to be shorter than it would have been had you not taken out the advance funds. But it is cheaper than a loan of any sort, just be sure to make appropriate adjustments so you are not left in a bigger bind.
Option 4 – Borrow from Your Retirement Account
If you have a retirement plan like an IRA or 401K you may be able to pull some funds from any amount you have accrued. It’s more like you are borrowing from yourself rather than from an outside lender. You are allowed to borrow from an IRA without penalty one time a year as long as you put the money back into the account within a 60 day period. If you do not make the deadline to pay the funds back, then you have to pay taxes on the money along with a penalty of 10% if you are under 60 years of age.
Not all employers offer 401K loans but if they do they you can borrow up to half of your balance and have 5 years to pay it back. The catch is that if you don’t make a payment on it for 90 days it will be considered as income which is taxable and it will have the same penalty as an IRA loan. One note on borrowing from your 401K is that you may be missing out on interest you would have gained or any returns on investments that the money in your account would have produced.
Option 5 – Credit Card Cash Advance
Most credit cards have an option of withdrawing cash as long as the account is in good standing. This is a rather expensive choice, but it is an option you have available. You’ll pay somewhere around 5% for a cash withdrawal fee plus interest that is charged on your credit card balance. Do some math because in most cases this is still a cheaper option than a payday loan – but not always.
Option 6 – Use one of the Programs Designed for Emergency Assistance
There are many organizations that provide emergency assistance to help avoid suspension of utilities or deal with a family emergency. Faith based and community programs often offer funds for these specific types of situations. There are also special federally funded programs that help low income families meet their basic needs as well as helping to pay heating or cooling costs in emergency situations. Some of these alternatives have specific stipulations or eligibility criteria that must be met in order to obtain assistance.
Option 7 – Sell items at local Pawnshops
There are pawnshops in most cities. You can take in items you no longer want such as musical instruments or small electronic devices and exchange them for cash. It’s a way to get money very quickly. It’s technically a collateral based loan and it will cost you more if you decide you want the item back. You have a specific amount of time to pick up the item and pay the extra fee if you want to get it back. These types of loans are handled differently in each state so the finance charges can be very different depending on the region you are in.
Option 8 – Borrow the Money from a Friend or Family Member
Most of us have caring friends or family members who we trust and really do not want to see us in a bind. They may be willing to offer you some money to help you get by to payday so you don’t have to pay the extreme interest on a payday loan. It is advisable to get the terms for any loan, even from your closest friend or your parents, in writing. When you have a predefined date the money is due to them it is easier to keep up with so that you don’t forget. This helps you preserve the relationship. Be sure to write down whether they want you to pay it all back at once or if making small payments is satisfactory.
Option 9 – Take an Extra Job
If you need more money coming in and don’t want to continue paying the high interest on payday loans, then you may want to look at taking a second job at least temporarily. This can be very difficult on an individual but it can be a better option than getting stuck taking out payday loans repeatedly. If you have a skill you can try freelancing, or you might benefit from a weekend job for a short time until you can get ahead with your finances.
Option 10 – Credit or Debt Counseling
If your check is always running a little bit short, most regions offer debt or credit counseling for free or very little payment. They can help you determine how to make your finances more manageable. A debt counselor can help you learn ways to reduce or get out of debt. They can also provide financial guidance to help you learn how to make ends meet by cutting costs, getting out of debt entirely and how you can save up for emergencies in the future. They can help you create your personal debt management program.
Is there a way to prepare for financial emergencies?
It’s not possible to predict when an emergency is going to occur. But there are some ways to prepare for them should they happen. One suggestion is to maintain a savings account with a minimum balance equal to two month’s expenses. If having that much set aside is beyond your financial capabilities, then try to have a balance that could pay your basic expenses for a month. You might even start with saving an amount equal to a single paycheck. Another way to prepare for emergencies is to keep a couple of credit cards available in case of an emergency.
Now that you are aware of payday lenders and some other options you can decide which one meets your specific needs. Payday loans are a good choice if you need emergency cash quickly and for a short time. There are other options that can also serve the need. You can choose which alternative works best for you.