What You Should Do Instead of Taking Out a Payday Loan

glasses-543117_640Payday loans can be a real blessing and a curse. On one end, they provide quick cash that can help you get out of a financial bind when you have very little options. On the other hand, interest rates tend to be high and they can really set you back financially when you have to start paying back the loan.

Payday loans are generally reserved for people with bad credit and therefore can’t qualify for other personal loans. This is how payday loan companies trap you with outrageous interest rates like 400% APR for example. Borrowers are often required to pay back their loan plus interest by their next pay period so the process is usually pretty quick.

The only problem is that it can create a continuous cycle where you depend on payday loans to keep you afloat. If you pay your loan back plus interest with your new paycheck, that might put you in the hole for bills and expenses for that month and if you end up running short, you may look to temporary relief from a payday loan again.

The bottom line is that payday loans are the worst type of loans and don’t really help you get ahead. They should be considered an absolute last resort and even if you don’t have many options, you have better options.

Here are a few alternatives to consider if you don’t want to take out a payday loan.

1. Call Your Creditors and Bill Companies

If you know you can’t pay an upcoming bill in full but you might be able to make a partial payment, call your bill company to let them know. Most companies don’t want to deal with the hassle of sending your account to collections or having to chase you down so if you take the responsible route and reach out to them first, they may like that and be willing to work with you.

My husband and I did this once when we were dating. He usually pays the cable/internet bill and he couldn’t afford it one month so I told him to ask the company if he could submit half the payment for now and the other half when he got paid. They were fine with this and just gave him a deadline for the rest of the payment.

When you have debt however, things could be different if you have a strict agreement in place. Some lenders might be able to work with you though so it’s still worth a try. Worst case, you can let them know that you will be late with your payment and accept a late fee. Late fees can vary depending on the lender’s terms and as long as they are aware of it and don’t put it on your credit, it may be a better solution over taking out a loan and paying 10x that late fee in interest.

2. Use a Credit Card

This is not the best option because getting into debt period is not a good solution, but it may be better than taking out a payday loan. If you have any credit cards with an available balance, the interest rate will probably be much lower than what a payday loan company would offer you so it could lower the damage. If you have a credit card with a 0% introductory APR rate, that would be even better because you won’t be charged interest on your purchases for a limited time.

Depending on when you make the purchase on your credit card and when your statement ends, you can organize it so you won’t have to pay interest either as long as you make your payment before the billing cycle ends. With credit cards though, it’s important to watch your utilization so if you need $1,000 and your limit is only $1,500, your credit could take a hit if you carry the balance because your utilization rate will be 66%.

3. Do Some Side Work

You may be able to do some work on the side to round up the money you need instead of borrowing it or taking out a loan. If you don’t want to flat out ask family or friends to loan you the money, you may want to ask if you can earn some extra money or provide a service instead.

Maybe you can babysit a few nights a week, run errands, do handyman tasks, walk dogs, or sell scrap metal. A side hustle that allows you to earn some quick cash can be a great solution.

You can also sell things you don’t want or need around your home. You can put listings on Amazon or Ebay, but you can also go to local consignment shops that will pay you on the spot for your items if you need quicker cash. Check to see if there are any used furniture stores in your area that will buy items from you.4

My husband and I sold out old coffee table to one of those stores for $10 once. If you have clothes you’d like to sell, you can try Plato’s Closet or Clothes Mentor. If you have kids’ clothes and toys, Once Upon a Child is a great option and Disc Replay is another option if you have old movies, games, and other electronics to sell.

4. Peer-to-Peer Lending

Peer to peer lending is a unique way for borrowers to get a personal loan and investors to get some ROI by lending the money they have. It’s called ‘peer-to-peer’ lending because instead of applying for a loan with an actual lender, borrowers apply for loans with investors which are often everyday people trying to earn some interest on the money they loan out.

Sites like Lending Club and Prosper offering peer-to-peer lending services and during the application process, each applicant’s credit is analyzed to determine their risk level. The good news, is that requirements may not be so strict since the lenders are your peers and if your credit is not as good, they may offer you a loan but they might just charge more interest.

Yet and still, peer lenders probably won’t give you a 400% APR rate so you can still save a little money on your loan.

Starting an Emergency Fund

The best way to avoid having to take out a payday loan is to start an emergency fund. An emergency fund can come in handy when unexpected expenses pop up and you don’t have the money in your checking account. It’s not hard to start saving either if you start small. I wrote a post about how to start a baby emergency fund before and every little bit really does count.

When you have extra money even if it’s just $10 or $25, transfer it to a secure savings account and grow it over time so you can have a nice cushion of cash to fall back on in the event of a financial emergency.

Have you ever been faced with the choice of taking out a payday loan? How do you plan to build your emergency fund?

Posted in: Credit and Debt

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