How payday loans work – biggest dangers and 14 better alternatives (part five)

July 25, 2019

Clearing up debts

If you can’t get an advance from your boss, you can do the same thing through an app called Activehours. You just send in a picture of your time sheet to show how many hours you’ve worked. The company deposits your pay for those hours into your bank account, up to a maximum of $100 per day. Then when your paycheck comes in, Activehours takes the money it’s already paid you directly out of your account.

On the face of it, this looks a lot like a payday loan. You’re still getting a lump sum that you have to pay back all at once, automatically. The big difference is that, with Activehours, you don’t have to pay a huge fee – or any fee at all. You can give the company a “tip” for its service if you want to, but you get to decide how much.

Want a solution that is even easier? Open a Chime bank account and set up direct deposit with your employer. Once you do that you will automatically receive access to your paycheck two days early.

6. Borrow from friends and family

In some ways, borrowing money from friends and family is the best deal you can get on a loan. People who care about you are unlikely to turn you down for a loan if you’re in need. They’re also likely to give you plenty of time to pay it back and go easy on you if you miss a payment. Sometimes they don’t even ask for any interest.

The downside is, hitting up friends and family members for money can put a strain on the relationship. If you borrow money often, take too long to pay it back, or don’t pay it back at all, they’re bound to start feeling put-upon. And if you keep stiffing the same people, sooner or later they’re going to put their feet down and say the bank is closed.

To avoid this problem, try to be a considerate borrower. Never let friends and family think you’re taking them and their money for granted.

Here are several rules to keep in mind:

• Explain the situation. Let your friends and family know what you’re borrowing the money for. It’s their money, after all, so they have a right to know. Mom and Dad may be willing to float you a loan to cover emergency medical bills, but may not be so happy to pay for a ski vacation.

• Keep it small. Don’t ask friends and family for more than they can really afford to lend. Likewise, don’t borrow more than you can afford to pay back.

• Pay back promptly. Work out a schedule with payments that you can afford – and be conscientious about making those payments on time.

• Include interest. Loaning money isn’t free. When a friend lends you $200, that’s $200 they no longer have in their bank account. So it’s only fair to pay them back at least as much interest as they would have earned by leaving that money in the bank.

• Put it in writing. Have a written agreement that outlines your timeline for paying off the loan and the interest you will pay. This makes the terms of your agreement clear and prevents misunderstandings that could hurt your relationship.

• Say thank you. Most of all, remember to thank the lender. A loan is a favor, so show your appreciation just as you would for anything else.

7. Go to your bank

If you can get one, a personal unsecured installment loan from a bank or credit union is a much better deal than a payday loan. The interest is much lower, and you have longer to pay it back. According to the Federal Reserve, the average interest on a two-year personal loan was 9.75 percent in 2015. Even more importantly, you can pay in small, manageable chunks, rather than in one lump sum.

For instance, suppose you need to borrow $500 for an emergency home repair. If you went to a payday lender, you’d have to pay the full $500 back in two weeks – plus $75 interest. If it took you six months to pay the money back, you’d have to renew the loan 13 times, paying $975 in interest. As noted above, this works out to an APR of 391 percent.

Now suppose you went to the bank instead and got a $500 loan for six months at 10 percent APR. Your payment would be about $86 each month. In six months, you’d pay less than $15 in interest – less than you’d pay in two weeks with a payday loan.

One problem is that most banks aren’t willing to make loans this small. While payday lenders usually can’t loan more than $1,000 at a time, banks typically won’t lend less than $1,000.

However, there’s another way to borrow money from the bank for a short period: overdraft protection. This service lets you take out more money from the bank than you have in your account in exchange for a fee. This fee is called an NSF fee, for “non-sufficient funds.” In 2015, the average NSF fee was $33.07, according to Bankrate.

That’s less than the cost of a payroll loan, but it’s still a pretty hefty fee – and worse, you could end up paying it more than once. When your bank balance is in the red, the bank hits you with a separate NSF fee for every transaction you make. So until your paycheck comes in, every withdrawal, check, and debit card purchase costs you an extra $33. At that rate, the fees can quickly add up to more than the cost of a payday loan.

So if you want to use overdraft protection to tide you over until payday, do it carefully. If you have a lot of small bills and just one big one that’s more than you have in your account, pay the small ones first. Then pay the big one last, triggering the NSF fee, and don’t touch your account again until payday. That way, you’ll only have to pay the fee once.

 

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