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

August 1, 2019

Loan alternatives

10. Use online lenders

If you can’t get a loan from your local bank, try looking online. Many web-based lenders offer small, short-term loans, even for borrowers with poor credit.

Some sites to check include:

MyCashBorrow: This website is not a lender, but it helps low-income borrowers find loans. When you fill out an application at MyCashBorrow.com, the site finds lenders that would be willing to loan you the amount you need. Then the lender contacts you directly to complete the loan process. These loans work like regular payday loans, but the interest is much lower. For qualified borrowers, the maximum APR – including interest, fees, and other costs – cannot be more than 36 percent. However, there is no guarantee that you will find a lender wiling to work with you. If your credit is poor, there’s a chance you won’t be able to get a loan.

OppLoans: Online lender OppLoans offers personal installment loans to borrowers in 16 states. Its interest rates range from 99 percent to 199 percent APR. That’s much more than a bank loan, but it’s still cheaper than most payday loans. And paying in installments is much easier on a tight budget than paying back a lump sum all at once. There is no minimum credit score required for a loan, but you do have to prove that you have a steady income.

Fig Loans: If you live in Texas, you can borrow $300 to $500 from Fig Loans and pay it back in four monthly payments. The interest is $4 for each $100 borrowed per two weeks. That works out to an APR of 140 percent, roughly the same as for OppLoans. Like OppLoans, Fig Loans requires proof of income, but no credit check.

RISE: RISE offers loans of $500 to $5,000 to borrowers in 15 states – with no credit check. However, if you only want a small loan, RISE isn’t much cheaper than a payday lender. Its loans range from 36 percent to 365 percent APR, but small-dollar loans cost the most. The only real advantage is that you can pay off the loan on a schedule you set, instead of in a lump sum.

Lending Club: Lending Club is a peer-to-peer lender. It connects thousands of individual investors with people who want to borrow their money. You can get anywhere from $1,000 to $40,000 at rates ranging from 6 percent to 36 percent APR. The monthly payments come out of your bank account automatically. If you want to pay back your loan early, you can do so at any time with no penalty. Even buyers with poor credit scores (below 600) can apply for a loan through Lending Club. However, they’re not guaranteed to be approved.

11. Use credit cards

If you have a credit card, using it to pay for household expenses is much cheaper than going to a payday lender. Often, you can even use a credit card to pay other bills, such as your phone bill.

Using a low-interest credit card buys you a little extra time to pay for things. Often, your next paycheck will come in before you even get the credit card bill. If there’s enough in your paycheck to pay the whole bill, you won’t even have to pay interest.

But even if you take several months to pay off the balance, you’ll pay a lot less in interest than you would for a payday loan. According to Bankrate, the average interest rate for a credit card is around 16 percent. That’s much lower than the 391 percent APR of a payday loan.

Some bills, such as rent payments, can’t go on your credit card. But you can still pay for them with a cash advance. This is much more expensive than using your card the normal way, for several reasons:

1. Higher interest. The interest rate for cash advances is usually much higher than for normal card use. According to CreditCards. com, the median interest rate for cash advances is around 24 percent.

2. No grace period. With normal purchases, you are not charged any interest until the bill comes due. With cash advances, you start paying interest the minute you collect the money.

3. Fees. On top of the interest, you have to pay a fee of around 5 percent for cash advances. So if you borrow $300, it costs you $15 up front just to get the money.

But even so, cash advances are less exorbitant than payday loans. The $15 fee is stiff, but you only pay it once – you don’t keep paying it every two weeks until you pay back the loan. And the 24 percent interest is nowhere near the 300 percent or more of most payday loans.

12. Borrow against life insurance

If you have a life insurance policy with a cash value, you can borrow money and use the policy as your collateral. This only works for permanent life insurance policies (whole life or universal), which double as investments. You can’t borrow against a term life insurance policy, which is the most common kind. Borrowing against your life insurance has several advantages over borrowing from a bank. These include:

1. No need to apply. As long as your account has cash value, you can borrow against it – no questions asked. There’s no need to apply for the loan or have your credit checked.

2. Low interest. According to Bankrate, the interest on a life insurance loan is usually between 5 percent and 9 percent. This makes this type of loan cheaper than either credit cards or personal loans.

3. A flexible schedule. You have the rest of your life to pay back your loan. Unlike a bank or a credit card company, your life insurer won’t come after you demanding payment.

However, this kind of loan also has some downsides, such as:

1. Limited value. The amount you can borrow against your life insurance depends on the value of the policy. However, it takes years for a life insurance policy to build up a significant cash value. This means that in the early years of your policy, you won’t be able to borrow very much. But most payday loans are only a few hundred dollars, and there’s a good chance you can tap your insurance for that much.

2. Lower death benefit. If you don’t pay back your loan before you die, the insurance company subtracts what you owe from the amount it pays out on your death. If your family is counting on that insurance money, losing the value of the loan could put them in a tight spot. But if you’re only borrowing a few hundred dollars, it’s not that huge a loss to your family.

3. Risk of losing the policy. The biggest risk is that, if you don’t pay back the loan promptly, the interest keeps accumulating. In time, it could eventually add up to more than the value of your policy. If that happens, the policy will lapse completely. Not only will your heirs receive nothing, you could also owe taxes on the unpaid portion of your loan.

13. Withdraw retirement funds

If you have a retirement plan, such as an IRA or a 401k, you can draw on those funds for emergency needs. Making an early withdrawal from a retirement plan can be costly, but it’s often better than taking out a payday loan.

Traditional IRAs and 401k plans are funded with pretax dollars. This means that the minute you withdraw money from them, you have to pay all the taxes you didn’t pay on those dollars before putting them in. On top of that, you have to pay an “early withdrawal” penalty of 10 percent on any money you take out before you reach age 59 1/2.

There are a few exceptions to this rule, however. If you’re disabled, or if you need the money to cover high medical bills, you can withdraw from an IRA or 401k without owing taxes or penalties. You can also withdraw from an IRA to pay for college expenses or to buy your first home. And if you have a Roth IRA, which is funded with after-tax dollars, you can withdraw money you’ve contributed to it at no cost.

At first glance, an early IRA withdrawal looks more expensive than a payday loan. Say you withdraw $1,000 – the maximum allowed for most payday loans – and pay 15 percent of that in taxes. That comes to $150 in taxes, plus another $100 for the penalty. A payday loan, by contrast, would cost only $150 in interest.

The big difference is that with an IRA withdrawal, you don’t have to pay the money back. With a payday loan, you have to come up with $1,150 to pay the loan back by your next payday. With a withdrawal, by contrast, you can just pay the $250 in taxes and penalties and have $750 left to pay your bills. You lose the money from your retirement savings, but at least you don’t get stuck in a cycle of debt.

Next Week: Borrow from your 401k and final thoughts

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