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Payday loans are borrowing options that typically place people on a treadmill of never-ending debt.
The payday loan industry lends well over $38 billion annually. There are now more payday loan locations in the U.S. than McDonald’s – that’s more than 20,000 storefronts. These lenders tend to target the poorest communities; with the mean annual income of a payday loan customer at $26,167, according to the Consumer Financial Protection Bureau.
With that being said, if you are in need of financing, you should consider payday loan alternatives that can keep you out of a debt cycle.
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How Payday Loans Work
Payday loans provide short-term, high-interest loans – typically under $500.
For the borrower, a payday loan is a popular choice for financing because it’s relatively painless and easy to access. In most circumstances, a customer only needs to fill out some basic information and provide a post-dated check or bank debit authorization.
A payday loan term is usually between two to four weeks, with the check or the debit authorization already made out for the price of the loan plus fees. Often, there is a steep fee structure. If you miss the deadline for repayment, the late fees and increased interest rates quickly spiral out of control.
To continue learning how these loans work, check out our How Do Payday Loans Work article.
Alternatives to Payday Loans
If you face a financial crisis, you should consider a number of alternatives before looking into a payday loan. Here are some payday loan alternatives.
Personal Loans for Bad Credit
Even for those who struggle with maintaining a good credit score, there are personal loans for bad credit.
- Although most personal loans come unsecured, depending on the circumstances, it might make sense to explore a secured line of credit or secured personal loan. These loans come tied to a vehicle or house and therefore come with higher risk but better terms. They only make sense if you expect to meet every loan repayment on time and in full.
- Another option is to seek out a cosigner for a personal loan. With the addition of a cosigner, many financial institutions will accept poor credit, as long as the cosigner is in good standing.
- A final option is to shop around with all the bad credit lenders available to you. Explore what rates and repayment terms they offer and don’t be afraid to negotiate for better ones. Importantly, don’t settle for terms that make you uncomfortable or that you don’t fully understand.
Credit Cards for Bad Credit
For emergencies, it can be helpful to fall back on a credit card to cover the daily necessities. But can you get a credit card with a bad credit score? Some people with bad credit can get approved for a credit card; otherwise, the answer is to seek out a secured credit card.
Like secured personal loans, they require some form of security deposit as collateral and will have higher interest rates. You’ll need to plan ahead for this option so you can gather a security deposit and wait to be approved. It’s a good option to choose as backup in case you need it later.
Payday Loan Alternatives by Scenario
If your situation falls under one of the following scenarios, you should take the steps listed before taking out a payday loan.
Options for a Recurring Payment
- Renegotiate the terms of debt directly with the lender
- Request a deferment or forbearance period on a student loan
- Refinance your debt into one loan for a lower monthly payment
Options for a One-Time Emergency
- Use a credit card to cover the charge
- Ask a close friend or relative for a short-term loan
- Ask your employer for an advance on your next paycheck
- Discuss your options with the creditor directly
- Apply for a line of credit
Author: Jeff Gitlen