Payday loans, arguably the most hated personal finance instrument/ service that exists today. If not hated, there is practically no love for it. And there is good reason for the sentiment. Payday loans can charge an exorbitant amount of interest rate, often over 1000% APR. When one is going for a pay day loan or any type of short term loan, one should check what the APR (Annual Percentage Rate) is being charged on the loan.
I think pay day loans serve a purpose and hence the industry exists; however payday loan should not be a primary source for one to get a short term loan.
Things to try before going for a payday loan
Sell your old items: We all accumulate things in our household that we don’t have use for any more. If you can sell some of your old things, it will help you get cash.
Return a recent purchase: If you purchased something recently that you can still return and get your money back, it can be a good option to free up liquidity. You can always go back to the store and buy the item again when you have sufficient cash to pay for the items. Many big ticket items like TV, etc. have a long return period, so if after making such a big purchase you realize that it was not a financially sound decision, you should consider returning the item.
Borrow from a friend: If you are really in a short term need that you can justify to a fiend and show them that you have the ability to pay it back, you can approach some of your close friends and take help. Be honest and do not take advantage of your relationship with them. Money matters can easily create a rift in relationships.
Request for an extension or postpone your expense: Your next pay day is probably only 15 days away. If you are in need of immediate liquidity, check with the service provider or creditor if they can extend the payment deadline by taking a small payment now. Many service providers will give you an extension.
Alternatives to Payday Loan
If you have exhausted all these options, consider these alternatives to pay day loans:
Charge it on your credit card: I am not a fan of charging things on credit card that you cannot pay for. But when the option is between a very high APR on a pay day loan vs. a better APR on a credit card, I will go with a credit card. Try to make the full payment as soon as possible. If you want to save on interest expense, you can can get a 0% APR offer and speed up the payback process.
Advance from employee or a short term loan: Many employers can offer you the pay you have already earned if you request for it. It is similar to payday advances, but you ask your employer and don’t pay interest on it.
Cash Advance: Cash advance from credit card. A portion of your credit limit is often available as cash advance. This is basically a pre-approved personal loan but it can be cheaper than a payday loan. Try to repay such loans as soon as possible as the high interest rate will make having this debt very expensive.
Other Short term loans: Credit unions and peer to peer lending sites can offer personal loans at a better rate than pay day loans. Consider taking a personal loan with a payment plan that you can commit to.
Have you ever had to use pay day loans? Do you have an alternative to pay day loans?
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