Yesterday, I discussed in brief my conflicted opinions on payday loans. To summarize, I basically think they border on predatory, but they exist because society provides no safety net to low-income people, and thus they do fill a marketplace niche.
The typical person who takes out a payday loan is an individual who has not built an emergency fund for themselves and is finding themselves with emergency (or pseudo-emergency) expenses that exceed their current funds. The prevalence of payday loan businesses make it easy for them to get such loans with little effort, and thus many, many people fall into that high-interest trap (that’s why so many of these businesses can survive and thrive). It’s truly an unfortunate situation, one that thrives on a lack of basic financial education.
Here are ten options for you to consider before you take out a payday loan. I know that most of the readers of this article aren’t in a financial situation where a payday loan is needed, but if you know someone who does, please print out this article and give it to them or else send them the link to this article.
1. Ask a family member for a loan in writing. If you are in desperate financial straits, ask a family member for a loan. However, you should encourage them to prepare the loan in writing and have the agreement notarized so that it is legally binding. Why? If you make the loan solely based on “trust” between you and the person you ask for the loan, you’re almost always going to damage the relationship you have, whether you directly see it or not, because you’re transferring your financial hardship to someone else temporarily.
2. Contact the companies that you owe money to. Ask to speak to a supervisor and attempt to negotiate a different payment plan, a reduced rate, or whatever you need to make the payments more manageable.
3. Take a cash advance on a credit card. Even the worst credit card has a far, far better interest rate than any payday loan outfit. If you can, take a cash advance on your credit card instead of seeking out a payday loan, as you’ll have to pay far less interest in the long run (approximately 25% APR versus approximately 350% APR).
4. Contact a local credit union. Credit unions are usually the best bet for obtaining small loans in emergency situations, even if your credit isn’t so good. Again, even if you have to get a relatively high rate loan from a credit union, it is nothing compared to the rate you’ll have to pay on a payday loan (approximately 10% APR versus approximately 350% APR).
5. Sell some items you don’t need. Look around your home and see what can be sold to net some emergency cash. Got a big pile of DVDs or CDs that you barely watch or listen to? Take them to a used media store. Have a Playstation 2 and a bunch of games in the closet? Take them all to the local GameStop. Even if you think you might use them again someday, you’re still way better off going this route than paying huge interest rates on borrowed money.
6. Find a temporary job. Get a part-time job wherever you can to earn some extra cash to help pay off your debts. While this won’t help immediately, it will help immensely over the long run to repay anything that you are forced into borrowing.
7. Look for social services that can save you money. The best place to start with this is to call your local social services center. Many people are eligible for programs that they’re not even aware of that can help with food, energy, and child care bills, which can reduce your financial burden and make it possible for you to dig out of debt. A friend of mine was once in a very, very scary financial situation and social services made it possible for her to turn things around.
8. Look for opportunities to eat and enjoy recreation without cost. Don’t be too proud to visit soup kitchens or church dinners if you’re in a financial disaster. You should also try to find free forms of entertainment to reduce your costs there as well.
9. Be open with those who are immediately affected. If your debt situation is going to impact your spouse, talk about it immediately. If it’s going to impact your children, make sure they know what’s going on. The less informed everyone is, the more painful and confusing and frightening it can be, especially for children. Even more important, the more informed everyone is, the more opportunities everyone has to use resourceful behavior to help solve the situation.
10. Don’t be afraid to ask for advice. You may be ashamed to talk about your financial problems with someone else – don’t be. Find someone you trust and tell them everything. Not only will this relieve a bit of your own psychic burden, but the person you talk to may have a ton of good ideas that can help you out.
Once you’re out of this situation, you should start an emergency fund. Open up a savings account at another bank and have them make automatic small withdrawals each week from your checking account. It’s small, so the financial impact won’t be great, and it’s automatic, so you don’t have to think about it, the money builds up quietly for you. That way, when things go wrong, you can go tap this account to fix the emergency.
One more thing: whenever you think of spending money for something unnecessary, think of how terrible it felt being in such a scary debt situation and ask yourself whether that money you’re about to spend might not be better off in your emergency fund or paying off a credit card debt.