As the pandemic grinds on into its fifth month, eviction moratoriums are expiring, and the additional $600 weekly federal unemployment benefit has ended. This has left many in a tough spot. According to a NextAdvisor survey, more than half of American households who received the extra $600 had no plan for what’s next as high unemployment lingers.
If you’re struggling to get by, it’s important to understand the choices you have. Options like payday loans can leave you worse off than before.
Payday loans are essentially an advance on your next paycheck. You borrow an amount typically less than $500, and the loaned amount is paid back from your next paycheck—often with a very high interest rate.
While some states outlaw payday loans outright or limit the interest and fees, most do not. That means it’s not hard to end up with a payday loan with an APR, or annualized rate of interest plus fees, of close to 400%. That’s over 25 times the APR you’d pay on a typical credit card.
To make matters worse, the Consumer Financial Protection Bureau just ended a regulation requiring payday lenders to verify a borrower’s ability to repay before issuing a loan. This makes it easier for someone trying to make ends meet to potentially spiral even further into debt with a payday loan.
Thankfully, there are ways to access small amounts of cash without paying extremely high interest and fees. Here are a handful of options to consider before you turn to a payday lender.
What to Do When You Need a Small Loan
If you’re struggling to pay bills on time, take a step back and assess the situation. This can be the hardest part, especially now, says Tara Alderete, director of education and community relations at Atlanta-based non-profit financial counseling firm Money Management International. Alderete recommends starting by separating your spending into wants and needs. If something is a want, then wait and save up to make the purchase.
When it comes to needs, you may be able to find assistance outside of a loan. Many local charities and government organizations offer help if you’re struggling to pay for necessities, like food, utilities, or medical bills.
But after applying, it can take up to a month to receive some government benefits. If you need more immediate assistance, you can call 211. An operator can connect you with local charity offices, like the United Way or the Salvation Army, which may have quicker turnaround times.
Looking forward, Alderete counsels individuals to lay a foundation to help be better prepared for similar situations in the future. Taking care of your credit and setting up an emergency fund will give you more options when you need cash quickly.
Instead of a payday loan, consider other options first. A lesser-known alternative is the payday alternative loan (PAL) – a more affordable option through a credit union with lower interest rates compared to a payday loan.
Payday Loan Alternatives
It may be ideal to set up a budget and emergency fund to eliminate the need for a small loan, but the reality is that emergencies happen. And unfortunately, living through the worst pandemic in a century doesn’t relieve us of the need to keep the car running and the lights on.
Any time you borrow money, pay attention to the fine print, so you know what you’re agreeing to. Consider not only the interest rate but also the fees and what will trigger them. Understand what, if any, loan origination fees and prepayment penalties are attached to the loan, which can unexpectedly increase your costs. Be sure you understand the repayment terms, so you know exactly what you’ll owe and when it’s due.
Here are a few options that, while not always ideal, are better financial decisions than taking out a payday loan.
Unsecured Personal Loan From a Bank, Online Lender, or Credit Union
Getting a personal loan from a bank could be a decent option, but rates vary widely depending on your credit score.
It’s complicated right now because credit is very tight, says Greg McBride, chief financial analyst at Bankrate.com. Banks are currently more hesitant to issue personal loans, even small ones, if you have poor credit. And if you have a lower credit score, you’ll get stuck with a higher interest rate.
If you don’t have excellent credit, your options for getting a small amount of cash quickly, and with a decent interest rate, may be more limited. But having a preexisting banking relationship is helpful, particularly with federal credit unions. If you’ve been a member of a credit union for at least a month, you can apply for a payday alternative loan (PAL), Alderete said. These loans are typically for $200-$1,000 and have much lower interest rates than traditional payday loans.
However, the interest can generally range between 28%-35%, making some credit card APRs a better alternative.
We don’t recommend putting expenses on a credit card if you can’t pay it off each month, but even a credit card’s interest and fees can be more manageable than what you’ll get hit with on a payday loan. In early 2020, the average credit card interest rate was 15.09%, while the average APR for those with poor credit was close to 23.5%. Some credit cards have promotional 0% APR periods for which you may qualify. It’s important you check your card’s APR before choosing this option.
With many credit cards, you also have the option of taking out a cash advance. But a credit card cash advance is even more expensive than carrying a monthly balance. Cash advance interest rates are almost always higher, and you’ll start paying interest on day one. (With a typical credit card purchase, you won’t pay interest until the billing cycle closes.) So only take out a cash advance if you can’t pay your emergency bills with a card and you have no other options besides a payday loan.
If you have the time, there are ways to find work you can fit around your schedule. Alderete says apps like DoorDash, Instacart, and Amazon Flex offer a chance to make some quick money on your schedule.
Gig work can be an excellent way to build up your savings, but you may have to wait up to a week to get paid. Also, while bike delivery is available in some cities, most gig work requires a reliable vehicle. And while many delivery services are seeing increased demand, many unemployed and underemployed people are signing up to work for these companies, making it harder for everyone to make a decent living.
Withdraw From Your Retirement Account
Depending on the retirement account you have or the type of expense you need to pay, you can take a loan out or make an early withdrawal. Usually, early withdrawals from your retirement account result in fees and tax implications. That’s in addition to the potential return on your investment you’d be missing out on.
But, if you only need a small amount of money, it’s not the worst option.
If you’ve experienced financial hardship because of the pandemic, it’s now easier to borrow from a 401(k) account. Congress passed the CARES Act in March in response to the hardship experienced by financially impacted Americans. It has a provision waiving extra fees and taxes on 401(k) loans. If you qualify, you’ll still need to pay the money back within three years. Otherwise, it will be counted as taxable income.
Other Loan Alternatives to Watch Out For
Aside from traditional payday loans, there are other loan options you’ll want to avoid in most situations. These options either have similar terms to a payday loan or have their own unique risks.
Payday Advance Apps
Depending on your job, you may be able to get a payday loan for the hours you’ve already worked but haven’t been paid for by using a payday advance app. You’ll need to verify your employment and income, and many payday advance apps need to be set up by your employer.
On the surface, these apps seem like less nefarious payday loan alternatives. For example, some don’t send debt collectors after delinquent accounts or allow loan rollovers. Instead, you’ll just get cut off from borrowing if your loan isn’t paid back.
One popular app even offers an optional “tipping” feature in lieu of interest or fees. While no interest is nice, even a $4 “tip” on a $100 two-week payday advance equates to a triple-digit APR. Also, most of these apps require access to your bank account so they can automatically withdraw the money you borrowed. This puts you at risk of incurring overdraft fees if the withdrawal exceeds your account balance.
Overall, a payday advance app isn’t a long-term solution because you’re still taking money from your next paycheck. With less cash on hand in the future, it’s easy to create a cycle of relying on payday advance apps, just like with a payday loan. A handful of states are investigating these apps for predatory lending practices. And some have accused them of essentially being a payday lender, under a different name, in an attempt to skirt lending regulations.
Secured loans often have better interest rates, and can be easier to qualify for, than unsecured loans. This is because the loan is “secured” by an asset you own, and if you can’t pay up, the lender can take your collateral.
So while a secured loan is safer for the lender, it’s riskier for you.
Secured loan options include home equity lines of credit (HELOC), auto-title loans, and pawnshop loans. If you’re struggling with your bills, putting your house or car on the line could make a bad situation worse.
With a pawnshop loan, you may not be putting something critical to your survival on the line, but you’re usually getting a bad deal. You’re going to get pennies on the dollar of what the asset is worth, McBride said about pawning your valuables. So you might not be able to borrow as much as you think. And if you don’t pay back the loan, plus fees, within the agreed-upon time period, you lose the item.