When you’re desperately in need of money and have exhausted all other options for short term loans, you may consider turning to payday loans to solve your cash flow problems. Unfortunately, these types of loans can be very expensive. In fact, the average payday loan costs $17 per $100 that you borrow, which equates to an annual interest rate of 442 per cent! If you fail to repay on the due date, then you may incur late payment fees and additional interest.
Although payday loans can be obtained with relative ease, they are often more costly than many other types of short-term loans. For this reason, you should explore other cheaper alternatives before settling for payday loans.
1. Bank overdrafts: Instead of taking out a payday loan, you can ask your bank to provide you with overdraft protection. Overdraft protection is a feature on many bank accounts where if you make a purchase and there isn’t enough money to cover the cost, the bank will cover the remaining balance of the transaction when you go into overdraft.
To get overdraft protection, your bank may charge you an administration fee, an arrangement fee, and a monthly fee along with interest. Most banks charge an admin fee of $5 plus an annual interest rate of 21% on the amount you borrow. Despite these multiple fees and interest, overdraft protection is usually cheaper than a payday loan.
The downside of overdraft is that the bank may choose to cancel your overdraft protection at any time and ask you to pay up immediately. Also, you will have to be careful not to exceed the overdraft limit as the penalties for doing so could be very high.
2. Credit Unions: Borrowing from a credit union could be your best short-term loan option if you are a member. These non-profit community-based organizations are formed to help their members manage their money and to offer savings, loans and current accounts.
If you have a steady income, then your credit union may be able to lend you small amounts of money. Because of the non-profit nature of the organizations, they often have minimum fees and interest, which make them popular choices for members.
3. A line of credit or personal loan from your bank: Depending on your credit score, income and debt levels, your bank may be willing to give you a small loan. A personal loan will allow you to borrow a fixed amount of money and pay it back over a fixed period of time. Bank loans and lines of credit can run anywhere from 3% to 50%, but it’s still much cheaper than a payday loan, which can have anywhere from a 300 to 600% interest rate!
4. A cash advance on a credit card: While credit cards typically carry a higher interest rate, if you’re truly only borrowing funds until your next paycheck, a cash advance on your credit card will be cheaper than a payday loan. These cash advances typically charge you $5 for the transaction plus a 23% annual interest rate on the amount you borrow. While this is higher than the interest on a typical credit card charge, it’s still much cheaper than a payday loan. If you have maxed out all your credit cards and are relying on a payday loan to make ends meet, it’s a sign you’re in financial trouble.
5. Ask your employer: If you have a considerate employer, then asking him or her for an advance on your salary can be a far better option than most of the other types of short-term loans. This would essentially be a payday loan, but without the high interest rate and fees.
Some generous employers are willing to forward an advance without any fees, while others may make a small cut in your next salary or ask you to repay over multiple pay periods. If you work in a small organization, you may talk to the boss directly; otherwise, you can ask your immediate supervisor or someone in the human resources department.
Additionally, you can see if you have any vacation days that you can cash in.
In addition to these, there are several other payday loan alternatives you can explore. You could check out some of these side hustle ideas or work overtime if your employer allows. You can also try to sell personal belongings that you don’t need anymore. You can borrow from a friend or relative if they are willing to help you out. Or, if you have an outstanding loan, you could ask the lender to extend the due date. The bottom line is that you should consider all available options before applying for a payday loan.
Remember, even these payday loan alternatives should be used only for short-term cash emergencies. You should not rely on advances, loans from friends or overdrafts. If you find yourself short on cash on a regular basis, it’s time to look at your budget. Contact a credit counsellor for personalized advice on creating a budget that allows you to live within your means.