When you need cash fast, you may be tempted to take out a payday loan or credit card cash advance. However, these debt products can become more expensive than you think due to high-interest rates and fees. Instead, consider personal loans with lenient requirements and quick funding. Use online tools to prequalify and compare loans on an apples-to-apples basis.
Payday Loans
Payday loans are a fast way to
get money quickly, but they can also be very expensive. In fact, according to a
recent St. Louis Fed article, about three-fourths of payday loan online users repeat
the process, and they often end up paying a lot more in fees than the initial
cost of the loan.
One reason for repeated payday
loan use is that people need the money to cover expenses, like rent or
utilities, and aren't able to wait until their next paycheck. In addition, many
people who use payday loans live below the poverty line, and some even
have debt problems.
Another problem is that payday
loan interest rates are very high and can add up rapidly. Typically, the
average payday loan costs 391% APR, which is much more than what you'd pay on a
credit card. This is why it's important to know alternatives when you need
cash, and why it's good to build up an emergency savings fund.
A better alternative to a payday
loan is a personal bank loan or credit union, which can be used for a
variety of purposes. However, if you have debt issues, it's best to seek
financial counselling. Several non-profit agencies offer credit counselling at no
or low cost, and they can help you find solutions that will stop the need for
payday loans. You can also try talking to your creditors directly to see if
they are willing to work with you.
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Bank Loans
A bank loan is a type of
personal loan that comes from your bank. Banks review a borrower’s credit
score, credit history and income to determine how much money they can lend and
at what interest rate. Banks typically require a credit score of at least 690 and
multiple years of credit history to be approved for this type of financing.
Depending on the bank, they may also want a low debt-to-income ratio.
Having an existing account in good standing with the bank could help you earn a
lower annual percentage rate and added perks like a rate discount.
Consumers often use personal
loans to cover expenses such as a home improvement project, a wedding or a
vacation. They can also use these financing options to pay off high-interest
debt or consolidate multiple debts into a single monthly payment.
If you’re considering a
personal loan from a bank, it’s important to shop around to find the best
rates. Some lenders will let you submit a pre-qualification application to
check what your rate might be without having a hard inquiry on your credit
report.
Many banks offer flexible
terms and repayment schedules to meet the needs of borrowers. For example, TD
Bank offers personal loans in 15 states and Washington D.C. and funds loans
within a day. U.S. Bank offers its Simple Loan to checking account customers
for a one-time fee of $6 per $100 borrowed and has repayment periods of up to
seven years.
Payment Plans
Whether you need to buy a new
laptop, cover a medical bill or make a home improvement project, it’s often
easier to spread the cost out over time than pay all of it at once. Taking out
an easy loan to cover immediate expenses can help you avoid a large financial
shock that may strain your budget. But it’s important to shop around for the
best rates and terms before applying. Many lenders offer a variety of fast
loans that are relatively simple to get, including emergency loans, payday
loans and bad-credit or no-credit-check loans. These loans are designed to meet
the needs of borrowers with limited credit and income. But they can also be
costly and cause long-term financial problems.
Another option is a personal
loan for emergencies, which is safer for your finances than payday and
high-rate installment loans and can be approved with a higher credit score and
lower debt-to-income ratio. Some online lenders offer affordable personal
loans, with no guarantor and a fast application process.
Alternatively, you can try to
borrow money from a friend or family member. This is a way to avoid a formal
approval process and might save you the cost of interest. If you do borrow from
a friend or family member, it’s essential to discuss the repayment terms and to
be sure that you can afford to repay the amount you will owe.
Paycheck Advances
Everyone needs a little extra
cash at some point. Whether it's a one-time emergency expense or a surprise
bill, borrowing can help cover the cost. However, borrowing money isn't always
the right option.
For example, payday loans can
be costly. These short-term loans come with high fees and interest rates, often
more than 900% APR, that can dig borrowers deeper into debt. Twelve million
Americans rely on these loans each year, according to a study by Pew Charitable
Trusts.
If you find yourself needing a
quick cash infusion, consider talking to your creditors instead of a payday
lender. Creditors like utility companies and lenders often have special
programs that can offer temporary relief to borrowers. It might take a bit more
effort to call, but it may keep you from being charged late fees and allow you
to make an affordable repayment plan.
Employers can also help their
employees avoid financial emergencies by offering paycheck advances. This type
of advance allows an employee to receive a portion of their paycheck before
their scheduled pay date. It's typically paid back, with or without a fee, when
the employee receives their next paycheck. It can be a good solution to a
financial crisis, but it should only be used for an emergency. Otherwise, it's
important to take a hard look at your budget and decide which expenses can be
cut and which ones are essential to keep you from needing a payday loan in the
future.
Ask a Friend or Family Member
Depending on your
circumstances, asking friends or family members for help is often the most
reasonable option. They will likely view it as a favour, not a loan and may be
willing to help out, especially if they know you are working to get your
finances in order. If you are able to come up with an agreement on terms, this
can be an effective way to manage expenses and save for the future. It’s a good
idea to run your numbers before making the request and be realistic about what
you need. If you’ve recently lost a job, for example, eliminate unnecessary
expenses and consider the amount of money you can expect to receive from
unemployment benefits.
If you choose to take this
route, make sure your friend or family member knows that you’re going to treat
it like a normal line item on your budget and that you’ll pay it back promptly.
You can even offer to babysit or clean for them in return so that you don’t put
a strain on your relationship.
Another great way to handle
short-term financial emergencies is to build an emergency fund. This can be an
excellent way to avoid payday loans or credit card debt with high-interest
rates and fees. To make this work, you’ll want to begin saving early and stick
with it. You can also contact local charities and churches for assistance if
necessary.
Lending Circles
Lending circles (also known as
Rotational Savings and Credit Associations or ROSCAs) are groups of people who
agree to pool their money into a pool, and then take turns borrowing from it.
Each member pays into the pool on a fixed schedule, typically every two weeks
or once a month. They also decide who gets their turn to borrow first and how
much each person can borrow. Lending circles don’t charge interest and they
help members build credit.
For many Americans living paycheck
to paycheck, traditional bank loans and payday advances are out of reach.
However, a good credit score opens the door to affordable loans for home
purchases, cars and small business expenses. The Local Initiatives Support
Corporation (LISC) has partnered with Mission Asset Fund and JPMorgan Chase to
create a new social loan program called “Lending Circles” that builds pathways
to prosperity through zero-interest loans.
The loan program provides
financial coaching and education to participants who are working with a Lending
Circle provider. In addition, all on-time monthly payments are reported to the
credit bureaus. This helps participants establish a stronger credit history and
build a more manageable debt-to-income ratio.
To be eligible, individuals must
meet certain criteria including having a steady income and a debt-to-income ratio
below 50%. They must also complete one or more online financial education
courses and a financial assessment. The lending circle, which is facilitated by
the local community-based organization, will determine whether or not they are
a good fit for the group and will make the decision on who can join the group,
what loan amounts will be available and the terms of repayment.
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