When an emergency happens, payday loans can quickly produce cash for people without another option. While it can be argued that the payday loan business model is filling a much-needed niche, with interest rates topping 400 percent, it can also be argued they are an expensive way to borrow money.
Financial advisers typically caution consumers to use such loans as a last resort and look first at alternative ways of getting cash fast.
“Payday loans are often a debt trap,” said James Zhang, head of personal loans at NerdWallet, a website offering financial tools and advice. “Although they look like a quick fix, they become much more costly over time. With some planning, everyone should be able to avoid payday loans. Personal finances are not easy to manage, but it’s doable— it all starts with education.”
Avoid borrowing money from a lender
First, ask yourself if you really need the money, Zhang said.
Are there any creditors that don’t charge interest on delayed payments? Some utilities and cable or telephone companies may accept delayed payments without charging interest.
Melinda Opperman, chief relationship officer at credit.org, a national nonprofit that offers financial education and assistance, said people should also consider help from food banks.
“Food banks can help people with food and other items, so that they can allocate some of that food money toward bills,” Opperman said.
People could also ask their employers if they can work overtime or reach out to family members or friends to see if they can help. Offering to pay a reasonable interest on the “loan” could also help avoid any potential relationship strains.
Asking an employer for a payroll advance could come in handy if the employee has a good relationship with the employer, Opperman added. Some companies also offer low-cost loans to workers in an emergency situation.
People can also borrow from their 401(k) through an IRA loan once a year if they can put the money back within 60 days. Employers that allow 401(k) loans can also withdraw up to $50,000, or as much as half of the vested balance in the account. Borrowers have up to five years to pay it back.
If payments are not made for 90 days, it’s considered taxable income. People who lose or quit their jobs often must repay the loan immediately, which can lead to more financial setbacks, Opperman said.
Another option is borrowing against permanent or whole life insurance. Term life insurance, a cheaper and suitable option for many people, does not have a cash value and expires at the end of the term, generally anywhere from one to 10 years. A whole life policy is more expensive but has no expiration. The term lasts the lifetime of the insured.
It is also important to understand that the policy loan is not taken out of your death benefit but borrowed against it, and the insurance company is using your policy as collateral for the loan. If you don’t repay, the insurance company subtracts the money from the policy payout when you die.
“Some clients will always wait until they get their tax refunds to pay off certain bills,” Opperman said. “I tell them, ‘Why are you waiting for a tax refund; you can readjust your withholdings now if you need extra cash today.’ ”
She added that many low- to moderate-working class people qualify for an earned income tax credit, which is a refundable tax credit. Nonprofits that offer Volunteer Income Tax Assistance can help.
Community loans and assistance may also be available to offer loans or short-term help for rent, utilities or other emergencies, Zhang said. NerdWallet has compiled a database of 140 payday loan alternatives at nerd.me/2cClgWS, available in 43 states.
Need money? There’s an app (or website) for that
Other times, access to fast cash is right in front of you, in the form of apps and websites such as eBay and Poshmark, to help sell clothing or household goods. There are also plenty of sites such as Swappa and Gazelle that will buy old cellphones. But to get cash today, ecoATM is the best bet, according to NerdWallet.
Even.com is aimed at balancing out uneven paychecks through a feature called pay protection, which makes sure people get consistent money every paycheck. For example, if your average was $500, and you got a paycheck for $450, Even would make a deposit of $50. The deposit usually arrives the next business day after your paycheck. Customers pay back only when they make a paycheck that’s bigger than their average, and only from any extra they make over their average, according to the website.
For many people, pay protection is free because their employer covers it. If employers don’t cover it, the fee is $3 per week, which Even withdraws from your bank account every Friday.
There is also ActiveHours.com, which lets users get paid for the hours they have worked in advance. The service lets users get credit for their earnings as soon as they’ve worked. Then, they choose what portion of their paycheck they want to deposit in the bank account and cash out. Users can decide how much to pay, the site notes, “based on what you think is fair.”
People can also try looking for a side gig to cover expenses. Sites such as LaborReady, LaborWorks and LaborFinders place people in jobs immediately. Craigslist also has plenty of short-term gigs, although people should be cautious when using the site. Taskrabbit also matches freelance labor with local demand.
People can also rent out a room for extra cash, with the help of sites such as Airbnb. People should check their local ordinances to make sure short-term rentals are allowed.
Zhang also suggests that people look into becoming a rideshare or delivery driver through companies such as Uber and Lyft. There are also delivery services such as OrderUp and Postmates, which pay for people to deliver takeout and other items. Through jobs such as these, people can earn between $10 and $25 an hour.
If borrowing money is the only option, Zhang said to shop around.
Pawnshop loans are probably the least toxic of all lenders, including payday and title lenders, according to NerdWallet. Pawnshop loans can run to more than 200 percent of the annual percentage rate, but there is no risk of damage to one’s credit or being pursued by debt collectors or in court. Plus, if people can’t repay the pawnshop, it will keep the item used as collateral.
Some small consumer loans, which are monitored by government regulatory agencies for their compliance with consumer protection regulations, are oftentimes better than payday loans, according to Michaela Harper, director of community education for the Credit Advisors Foundation, a nonprofit that focuses on financial educational and helping get people out of debt.
Depending on one’s credit score, there are banks and credit unions that may offer short-term loans with more competitive rates than payday lenders. And those who have a credit card with a good account standing may consider a credit card advance. Fees are typically around 5 percent of the amount borrowed, plus interest, which is roughly 30 percent.
Some credit unions also offer small, short-term cash advances, known as payday alternative loans, which can’t legally charge more than a 28 percent annual percentage rate.
Plan for the future
A recent Federal Reserve survey found about half of respondents said they’d have to sell a belonging or borrow money to cover a $400 emergency expense.
“It’s not a matter of if something bad will happen; it’s a matter of when,” Opperman said. “Everyone has life setbacks, and having an emergency fund makes the situation manageable.”
Although the amount of money one should have in the bank depends on each person, a good rule of thumb is to have enough to cover three to six months’ worth of living expenses.
“We recommend having a savings of around $500,” Zhang said.
Some tips to consider are setting a monthly savings goal, creating a change jar at home, saving tax returns and cutting back on costs , such as buying coffee, saving leftovers and cooking meals at home .
An emergency fund also can help people stay off the paycheck-to-paycheck treadmill.
Opperman also recommends people ask their employers how to move up to receive a promotion, while Harper advises people to start building personal relationships with bankers from local credit unions.
“I know we’re all very electronic-based now, but it doesn’t build relationships with people in credit unions,” Harper said. “Credit unions are the ones making the decisions, and the person you see and say ‘hi’ to every other week could end up helping you.”
Harper said showing the bank teller that you are putting money into a savings account consistently and leaving it there will create a bond of trust. They may even let people use their savings account as collateral for a loan.
People who take out payday loans are advised to speak with financial professionals who could help them create a payment plan.
“In most situations, the most effective alternative to payday loans is thinking about it in advance,” Harper said. “No one gets through life unscathed; there are always bumps on the road. Planning ahead can prevent most emergencies.”
This is the final story in a series about payday loans. To read all of the stories in the series, visit viewnews.com.
To reach North View reporter Sandy Lopez, email email@example.com or call 702-383-4686. Find her on Twitter: @JournalismSandy.
Find out more
For more information on credit.org, call 800-449-9818.