Running out of money is a constant and looming worry for millions of Americans who live paycheck to paycheck. About 12 million people take out short-term unsecured loans, sometimes called “payday” loans, each year, according to the Federal Reserve Bank of St. Louis. And while these loans can help you survive until your next paycheck, they also come at a steep price. Still, many will continue to rely on this dangerous financial tool, with millions of Americans out of work or facing reduced hours due to the COVID-19 pandemic.
If you don’t have a strong credit history, getting a traditional loan or credit card can be challenging. But there are plenty of lenders that will let you borrow without a credit check, with just a few questions. However, the terms will be severe, and you will undoubtedly end up costing much more than you borrowed. With a well-deserved reputation for “predatory lending,” payday lenders have led many borrowers into a spiral of debt and regret.
If you’re short on cash, you’re not alone. But before you apply for a payday loan, let’s review what they are, why you should avoid them, and who you can borrow money from instead.
What is a payday loan?
A payday loan is a short-term, unsecured loan typically carries a high-interest rate. Most payday loans come in modest amounts, usually $500 or less.
With a traditional loan, you receive a lump sum and then start making payments over a set period, from a few months to a few years, with a “reasonable” interest rate added on. The entire amount is due at once with a payday loan, including interest and fees. In most cases, you must either write a postdated check for the total amount due (the loan, plus interest and fees) or give your lender permission to debit the money from your bank account on that date.
Interest rates on payday loans are much higher compared to traditional loans. A standard APR for a personal loan ranges from 6% to 36%. Still, lenders offering payday loans can charge annual rates of 100% or more, and some have been found to exceed 1,000%, according to a ProPublica investigation. 2013. That said, some states have limitations on interest and fees, and in some states, payday loans are prohibited altogether.
It’s also worth noting that payday loan lenders tend to target people who live in areas where poverty rates are high and income levels are low, as well as minorities and economically disadvantaged groups, who can traditionally have had a more challenging time qualifying for conventional loans, according to a St. Louis Fed study.
Why You Should Stay Away From Payday Loans
There are twice as many payday loan lenders as McDonald’s restaurants in the United States, and borrowing money from one is as easy as ordering a hamburger and fries. Getting approved is relatively straightforward: Many payday loan lenders don’t even check your credit, so a tarnished credit history won’t be a factor.
That’s a plus for people with poor or limited credit histories. But high-interest rates and strict repayment terms force many into the payday loan trap, forcing them to take out new loans to pay off existing ones.
If you don’t have enough cash to pay off your loan by the due date, the lender may automatically trigger a withdrawal from your bank account. And if you don’t have enough money in your bank account to cover the charge, you could face an additional hit from an “insufficient funds” penalty. You may also be subject to lender penalties if you don’t receive your money on time.
If your state allows payday loan lenders, you may see them in some parts of your city and not in others. For example, there may be more of them where poverty rates are high and low-income levels. These types of lenders tend to target minority groups and those who have very low credit scores and may not otherwise qualify for traditional loans.
Payday Loan Alternatives
If you urgently need money to cover basic expenses, buy food or pay off high-interest debt, other options are to consider. Here are a few:
online lenders
There are many personal loans available online with more reasonable interest rates. Some lenders may look beyond your credit score when evaluating eligibility, even with less than stellar credit.
- OneMain Financial has no minimum credit score requirement, and you can borrow as little as $1,500, depending on where you live. Annual percentage rates range from 18% to 35.99%, and terms are from two to five years. They also have a pre-qualification option to see if you are eligible without applying first.
- Avant loans start at around $2,000, and your credit score must be at least 580 to qualify. APRs range from 9.95% to 35.99%, and repayment terms range from two to five years.
- Upstart takes into consideration your educational history and experience when evaluating eligibility. You can borrow as little as $1,000 and get your money within a day of approval.
These lenders tend to have higher than standard interest rates than other personal loan lenders. However, they are all much cheaper compared to payday loan lenders.
credit unions
If you have an account at a local credit union, you may find it easier to qualify for a personal loan. Most interest rates at credit unions are capped at around 18%, even for those with low credit scores.
Many credit unions also offer payday loan alternatives, offering cheap loans and short payment terms ranging from one to six months. Many credit unions require you to join before taking out a loan but are willing to work with you if you don’t have good credit.
Hire a co-signer
If you can’t get a loan from an online lender or credit union, you can ask a friend or family member to sign a loan. The co-signer must have decent credit; His credit score and history will help you overcome the eligibility problem. Keep in mind that if you fall behind on payments, it’s not just your credit history that will suffer; so will your co-signer.