Here’s the thing about payday loans: they are actually really expensive. They’re short-term, high-interest loans that are meant to help cover a small financial shortfall until your next paycheck. But their interest rates are ridiculously high – a typical two-week payday loan has an annual percentage rate (APR) of nearly 400%. To put that in perspective, even high interest rate credit cards have an average maximum of around 23%.
Here’s how payday loans work. When you take out a payday loan, you write a check for the amount you want to borrow plus the fee that the company will charge for their assistance. This fee usually runs you around $10 to $30 for every $100 you borrow, with the average falling right around $15. On your next payday, the payday loan company will cash that check and take the money directly out of your bank account.
For folks on a tight budget, that fee can be hard to cover. And if you can’t pay? They’ll simply roll your debt over to the next pay period and take another fee for their services. And that’s where they really get dangerous, because those fees compound and can reach huge amounts very quickly. This cycle of debt is the payday loan trap, where you’re forced to borrow again and again just to pay the fees for your payday loans.
So the general rule for payday loans is to never borrow more than you will definitely be able to pay back on your very next paycheck – but be very careful, because approximately 80% of payday loans end up being renewed or rolled over into a new loan.
Even when you need money fast, consider other ways to help avoid payday loans that will be better for your financial health in the long term:
1. Better Budgeting
It can be incredibly hard to stretch a small budget to cover everything that you need. You can start by writing everything out on paper and look for hidden costs that could be cut or reduced, like an expensive gym membership, cable, frequent fast food, or an overpriced cell phone plan. If none of those work, think bigger – can you move to a smaller apartment, use public transportation instead of your car, or save money on groceries by sticking to a prepared menu or clipping coupons?
2. Talk to Your Creditors
If you’re having trouble making payments, speak directly with your creditors to see if you can work out a payment plan. They tend to want to make a deal and it takes some of the immediate pressure off your next paycheck.
3. Ask Family for Help
If you have family you can go to, ask a family member for a loan. Also, encourage them to prepare it in writing and with a notarized signature to make it legal. This will be a gesture of trust and help preserve your relationship.
4. Ask for an Advance
Some nonprofit organizations, community groups, and employers offer emergency advances or credit. Check with your employer, and explore local resources, starting with your local social services center. You might qualify for programs in your area that can help with food, childcare, water, or electricity. These can reduce the burden of your immediate financial needs.
5. Take an Advance on a Credit Card
Even the worst credit card has a better APR than a payday loan. Be careful that you don’t send yourself into credit card debt, as always. But your long-term interest on a credit card will be lower than the 400% APR of the average payday loan.
6. Talk to Your Credit Union or Bank about Short-Term Loan Options
Even if you have to get a relatively high rate loan from a financial institution – somewhere around 10% would be considered high – the APR will be a much better deal in the long run. Even if you don’t belong to a credit union, contact a local branch – they’re often the best for obtaining small emergency loans, especially if your credit isn’t great.
7. Sell Some Unused or Unwanted Items
There are lots of resale stores that will give you money in exchange for your old things: GameStop buys video games and old cell phones, Buffalo Exchange buys clothes, and Bookman’s Entertainment Exchange buys books, movies, music, games, puzzles, and even musical instruments.
8. Look for FREE food and fun
Community or church events often offer free meals and activities. Your local library likely has entertainment options that come without a price tag.
With these tips, you can get what you want without getting stuck with outrageous interest rates of payday loans. As long as you investigate alternatives, there are always ways to avoid being financially taken advantage.