Payday loans, or payday advances, are typically two-week loans between $100 and $500. A consumer provides a payday lender with a post-dated check and receives cash for the check amount instantly, minus a 15 to 30 percent finance charge. When expressed as an APR (annual percentage rate), this rate can exceed 400 percent.
Many consumers can’t afford to pay off these loans within two weeks. They either roll over the loan or take out another payday loan to pay off the first one, says Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency based in Phoenix.
“If you know someone who is a regular user of payday loans, be aware that they are designed to be habit forming and quitting is much like quitting smoking. These folks have come to depend on that $100 or $200 every pay period, and they do not have the cash to just pay them off.”
Sullivan offers six alternatives to relying on steep payday loans to fund daily living expenses:
- Consult Family and Friends – Ask loved ones if they are willing and able to help out in a tough situation with a short-term loan. Always put these types of loans in writing, specify the time period in which the loan will be repaid and offer to pay interest. This will help ensure trust and reliability.
- Apply for Credit Union Loans – Most credit unions offer short-term loans like Personal Assistance Loans (PALs) or Quick Loans. These are typically unsecured, fixed-rate loans up to $500. Interest rates vary from 12 to 20 percent. Payment terms vary from a couple weeks to three months. Financial education or savings incentive plans are often included. Loans are available to credit union members only. They may require application fees.
- Sell Personal Items of Value – Consumers can sell items of value to a pawn shop or host a yard sale. Personal items can also be sold online through eBay or craigslist. When selling online, be sure to thoroughly review security guidelines.
- Seek Social Service or Government Assistance – Check out Govbenfits.gov. It offers information on more than 1,000 benefit and assistance programs. Visitors can complete a free, confidential questionnaire to find out which local benefits they are eligible to receive. Consumers in need can also find free assistance at food banks, churches and charitable social service organizations.
- Consult a Banker – Many banks will often assist consumers who inform them of a pending overdraft. They may be able to work out a short term solution on an individual basis with reduced fees.
- Get a Second Job – An additional part-time or temporary job may be necessary to cover extra expenses. Consumers with substantial debt may need more funding than a short-term loan can provide. Enlist the help of family and friends to cover childcare costs and chores at home.