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Alternatives to taking out payday loans

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By: tiarajoseph11
on 27th Jun,2016

Having problems with payday loans? Find out the alternatives by examining the characteristics of payday loans.
payday loan alternatives

When you have a financial hardship, opting for a payday loan is a quite easy way to choose. It gets you out of all the difficult situations when you don’t have money but, in such frustration, you may not see the outcome which can cost you a lot.

Characteristics of payday loans

So, before finding an alternative, let’s check the characteristics of payday loans:

1. Triple digit interest rate

The cost of a payday loan can be 400% of the APR (Annual Interest Rate) and higher.

2. The loan term is short

Seventy-five percent of payday loan borrowers can’t repay their loan within 14 days and are forced to continue it through loan "rollover" at extra cost. Practically, small loans have longer terms.

3. Single balloon payment

Payday loan lenders do not allow the borrowers to pay balloon installment payments during the loan term. Borrowers must pay the entire loan amount at the end of 14 days.

4. Loan flipping

Payday lenders get most of their profits by giving multiple loans to cash-strapped borrowers. 90% of the payday industry's revenue is generated from the same borrower by generating more and larger loans.

5. Multiple borrowing

Many borrowers opt multiple loans from multiple payday lenders to pay other debts. The result: no additional cash, just more renewal fees.

6. No consideration of borrower's ability to repay

Payday lenders may lend you the maximum amount allowed, regardless of your financial status like - credit history. Then if you fail to repay the loan, the lender will collect multiple renewal fees from you.

Alternatives to payday loans

Here are some possible alternatives to payday loans:

a. Payment plan with creditors

If you are already following a payment plan, several creditors will approve regular partial payments. This plan will help you to pay off your bills over a long period.

b. Advances from employers

Some employers allow advance paychecks. As this is a true advance, not a loan, so, there are zero interest charges. Practically, this is cheaper than a payday loan.

c. Consumer credit counseling

A consumer credit counseling agency can help you to work out a debt repayment plan or develop a budget. These services are available at a very low cost.

d. Overdraft protection

A fee against a bounced check is greater than the fee you pay to a payday lender. So, a better alternative to a payday loan is to stop all the bounced check fees initially. Many banks provide checking accounts with overdraft protection facility. For a little fee ($5) or lower, banks will protect a check by transferring money from the savings account.

Overdraft protection through a line of credit is also a good option, typically at 10% to 18% APR.

e. Credit union loans

Many credit unions provide small, short-term loans to their members in a cheaper rate than payday loans. Some credit unions also provide financial counseling totally free of cost and a savings plan. Many other credit unions offer very low-interest rate emergency loans (18% annual interest) with quick approval.

f. Cash advances on credit cards

Credit card cash advances are cheaper than a payday loan; normally these are provided at 30% APR. Secured credit cards may be another option for you. A secured credit card will be attached to a savings account. The funds deposited in the account 'secure' the amounts charged on the card. Once you have utilized the secured card for a certain period, you can qualify for a new regular unsecured credit card.

g. Military loans

Many companies offer military loans starting from $500 to $10,000. The main purpose of this loan is to provide financial support to active duty and retired military personnel. Payday loans are generally 10 to 13 times costly than the conventional small consumer loans. These loans have much lower APR, which is from 33% to 34.99%.

h. Small consumer loans

Small consumer finance companies provide small, short-term loans. These loans may cost you usually between 25% - 36% APR. These loans are also much cheaper than payday loans.

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