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When consumers with poor credit and little savings need cash in a hurry, payday loans can seem like the best choice out of limited options. But payday loans come with a slew of risks and disadvantages, the most egregious being sky-high interest rates and lack of transparency about fees. Thirteen states have even banned the practice outright or passed prohibitive usury laws. Whether you use payday loans on a regular basis or only once in a while, you should be aware of the industry's most troubling statistics, and then consider your other options:
- While APR on a bank-issued personal loan generally ranges from 10%-25%, the APR on a payday loan ranges from 300% to over 700%.
- The average payday loan user pays $574 in fees each year.
- Payday loans are illegal or prohibited by usury laws in 13 states.
- The average borrower is in debt to payday lenders for seven months out of the year, a figure that illustrates the system's tendency to keep users locked in a cycle of mounting debt.
When you're worried about paying a bill on time or facing a costly medical emergency, payday loans aren't your only source of immediate funds. Less risky options exist, even for borrowers with poor or no credit. Don't wait until you're drowning in fees to check out these safer alternatives to payday loans.
Small-dollar loans from financial institutions
The growing demand for small-dollar loans has enticed some banks to start offering loans of less than $1,000 for the first time. In fact, the FDIC initiated the Small-Dollar Loan Pilot Program in 2008 expressly to increase the availability of fair, affordable alternatives to overdraft protection fees and pricier loans offered by payday lenders. Their APRs range from 5% to 36%, so shopping around for the best rate is still a good idea.
Credit unions have also jumped on the small-loan bandwagon. In 2010, the National Credit Union Association instituted the Short Term Small Loan Program, or STS, permitting federal credit unions to offer STS loans of between $200 and $1,000 with an APR of 28% or less. Successful repayment of an STS loan can improve the borrower's credit and help him or her access loans with lower interest rates in the future.
Cash advance from employer
Asking your supervisor for an advance on your next paycheck can be awkward, but don't let that deter you if you're really in a bind. As long as you're in good standing with your company and don't make a habit of it -- asking more than once is almost certainly a bad idea -- this is a safe solution to a financial emergency. You'll be avoiding exorbitant interest rates, and since this type of request is a one-time deal, there's no opportunity for the advance to snowball into a larger amount of debt. Some HR departments even offer preprinted forms for requesting payment advances. You're the best judge of whether your employer could frown on this request, but meeting with your boss to calmly explain why you need an advance, just this once, is likely to get an understanding response.
Secured credit card
Applying for a secured credit card can be an excellent option for individuals with poor or no credit. This type of credit card requires the user to provide a cash deposit (usually between $300 and $500), which serves as collateral and determines the credit line. Once the deposit is paid, a secured card can be used just like any other for emergency purchases, monthly bills, and everyday expenditures. There are as many predatory options out there as there are safe, reliable ones, so be sure to shop around for a card that comes with a low interest rate and minimal annual fee. Secured credit cards also provide another benefit -- they're a great first step toward rebuilding poor credit.
Military aid societies
If you or someone in your family has served in the military, special financial aid may be available to you. Military aid societies such as Army Emergency Relief, the Air Force Aid Society, Coast Guard Mutual Assistance, and the Navy Marine Corps Relief Society offer grants and interest-free loans to military personnel and their immediate families. These programs are designed to assist with essential expenses, such as groceries, rent, and medical bills. Be sure to check out state-specific programs as well, such as the California Military Family Relief Fund and California National Guard Financial Assistance Fund.
What if I'm already trapped in the payday loan cycle?
If you're struggling to pay back an outstanding amount to a payday lender, avoid rolling over your balance into yet another loan at all costs. Next, get in touch with a credit counselor who can best advise which of these options is best for you and can help you create a plan for managing your debt. Be cautious when choosing a credit counselor; find out through your local attorney general and consumer protection agency whether users have ever filed complaints against the counseling service, and avoid agencies that require significant payment up front. Above all, make payday loans your last resort -- their convenience simply doesn't outweigh their hefty risks.