How payday loans work – biggest dangers and 14 better alternatives (part 4)

July 11, 2019

According to a survey by Bankrate, roughly 25 percent of Americans live paycheck to paycheck. The money they make just barely covers their day-to-day expenses, with little or nothing left over for emergencies. If you’re in this situation, any unplanned expense – such as a $300 car repair – can cause a financial crisis.

Alternatives to payday loans

It’s easy to argue that payday loans and auto title loans are just plain evil and should be banned completely. But the problem is, there’s a demand for them. A Pew survey finds that most payday loan users say these loans take advantage of them – but at the same time, most say the loans provide much-needed relief.

Fortunately, there are better ways to raise cash in a crisis. Sometimes, it’s possible to get by without borrowing money at all. You can sell off belongings or ask for an advance on your paycheck. You can also apply for emergency aid, such as Medicaid or SNAP (food stamps), or seek help with paying off other debts.

But even if you need to borrow money, there are better places to turn than a payday loan office. In many cases, friends and family can help you out with a loan. Pawn shops and many online lenders offer small loans, even to people with bad credit.

Finally, if you have a credit card, a retirement fund, a life insurance policy, or even a bank account, you can tap into it as a source of emergency cash. These options are costly, but in the long run, they’re better than being trapped in payday loan debt.

Here are several alternatives to and ways to avoid payday loans:

1. Budget better

As the 2012 Pew survey shows, most people take out payday loans to cover their day-to-day expenses. Borrowers give explanations such as, “I was behind on my mortgage and cable bill,” or “I have bills to pay.”

But in a situation like this, a payday loan is just a bandage. If you’re not living within your means, borrowing money doesn’t fix the problem. In fact, it adds to it by giving you interest to pay on top of all your other expenses.

What you need in this case is a better household budget. You have to take a good hard look at all your expenses – rent, food, utilities, and so on – and figure out how much you can really afford to spend on each one. Then you can look for ways to trim your expenses to get them in line with your income. It can be time-consuming to handle your budget manually. Services like Tiller will automatically pull all your monthly transactions into a spreadsheet helping you see exactly what you’re spending money on.

When your paycheck is small, it can be hard to stretch it to cover all your bills. But if you look carefully at your spending, you can often find hidden budget busters that can be cut. Services like Trim can also be great at finding recurring subscriptions you no longer need. They will even help negotiate some of your bills like cable and internet. Some examples include:

Gym membership. If you belong to a gym, switch to using free or cheap workout videos. With the average gym membership at $41 a month, this could save you $492 a year.

Cable TV. If you have cable TV, try a less expensive online TV service instead. The average monthly cable bill in this country is $99, but Hulu and Netflix both cost around $10 a month. Even Sling TV is a much cheaper alternative to standard cable. So cutting the cord could save you $89 a month, or $1,068 a year.

Cell phone service. If you have a smartphone with a pricey data plan, you can drop it in favor of a basic flip phone with a cheaper cell phone plan. Coverage from the major carriers costs at least $60 a month, but a basic prepaid phone can cost as little as $3 a month. That’s a savings of $57 a month, or $684 a year. Ting.com customers only pay for the talk, text, and data they actually use.

Bad habits. If you’re a regular smoker or drinker, kicking this habit can help your health and your wallet. A pack of cigarettes costs at least $6 in most states, so quitting a pack-a-day smoking habit saves you at least $2,190 a year. And cutting out just two $6 cocktails a week can save you $624 a year.

Food stops. Regular stops at the coffee shop, convenience store, or fast-food drive-through add up. Stopping just once for a latte, a taco, or a soft drink and a bag of chips only costs around $3. But do it every day, and that’s $1,095 a year you could be keeping in your pocket.

If cutting these small expenses isn’t enough to make a dent in your budget, try thinking bigger. See if you can find a cheaper apartment, give up your car, or slash your grocery bill by using coupon apps like Ibotta. Making cuts like this is painful, but tightening your belt now is better than getting stuck in debt for months or years at a time.

2. Use emergency assistance

Sometimes, you trim all the fat you can find from your budget and you still can’t manage to make ends meet. When that happens, there’s no shame in asking for help. Many churches and community organizations can provide short-term assistance with rent, food, utility bills, and other emergency needs. Some of them also offer small loans at very low interest.

In addition, there are government programs that offer help with the following:

Housing. According to the Center on Budget and Policy Priorities, more than five million American households receive some sort of federal housing assistance. Low-income households can use public housing, subsidized housing, or vouchers that cover part of their rent. To apply for these programs, contact your local public housing agency.

Healthcare. The Affordable Care Act, widely known as “Obamacare,” offers subsidies for low-income people to pay for health insurance. You can find out how to apply in your state by visiting HealthCare.gov. If your income is low enough, you can get free or inexpensive health coverage through Medicaid. You can also find affordable medical care through free clinics, retail clinics, urgent care centers, and nonprofits that help cover prescription costs.

Food. If your income is low enough, you can receive food aid through the Supplemental Nutrition Assistance Program (SNAP). This is the same program once known as “food stamps” – but these days, aid comes in the form of an electronic card. To find out whether you qualify for SNAP, check out the interactive tool on the site of the Food and Nutrition Service.

Utilities. The Low Income Home Energy Assistance Program (LIHEAP) helps low-income households with home heating and home air conditioning needs. Each state runs its own LIHEAP program with funding from the Federal Government. States can spend the money to help people pay their home energy bills, cope with weather emergencies, and make small repairs to heating and cooling systems. To apply for the program, contact your state’s LIHEAP office.

3. Build an emergency fund

Even with a good budget, there are always some expenses you can’t plan for. Any kind of emergency, such as a house fire or a car failure, can lead to big, unexpected bills. You can never be sure just when or how this kind of disaster is going to strike – but you can be pretty sure it will sometime.

For this reason, you should try to make room in your household budget for savings. By setting aside a little money – even just $10 or $20 – out of every paycheck, you can build an emergency fund to deal with these unpleasant surprises. If you can manage to save up even a few hundred dollars, you’ll be able to turn to your savings in a crisis, instead to a payday lender.

So long as you have money put away to pay for it, an unplanned expense is just a nuisance, not a disaster. And the more money you have set aside to deal with emergencies, the easier it is to get ahead in the future.

Pro tip: Your emergency fund should be located somewhere you have easy access to get the funds if necessary. We recommend using an online savings account with UFB Direct because they offer a 2.45 percent yield.

4. Pay your bills late

In theory, the point of a payday loan is to get you through a temporary cash crunch. If you have a bunch of bills coming due on Monday, but you can’t pay them until your next paycheck on Friday, a payday loan looks like a good way to bridge the gap.

However, in many cases, you’d be better off just waiting until Friday and paying those bills late. You’ll often have to pay a fee for it, but not always. For example, utilities such as the phone company and the electric company often accept late payments. If you’re not sure whether yours does, call to ask.

Even when you do have to pay a fee, it’s often less than the cost of a payday loan. The average fee for a two-week, $375 payday loan is $56.25. By contrast, here’s how other late fees stack up:

Credit cards. Rules passed by the Federal Reserve Board in 2010 set limits on late payments for credit card bills. The most the bank can charge you is $27 for a first offense, or $37 if you’ve been late before.

Mortgage payments. If you’re late paying your mortgage, most lenders charge you 4 percent to 5 percent of the payment as a late fee, according to Nolo. And The Motley Fool calculates that for people with incomes up to $50,000, the average mortgage payment is $615 or less. So the average fee for a late mortgage payment would be no more than $30.75. Plus, most contracts give you a grace period of 10 to 15 days – so if your payment is only a few days late, there’s no fee at all.

Rent payments. Renters also pay a fee for paying their rent late. According to RentLaw, most courts say a reasonable fee for landlords to charge is up to 5% of the rent. So for a $600 rent payment, the fee would be $30. In addition, some states say landlords can’t charge a fee at all until the rent is 5 to 10 days late.

Car payments. There’s a similar rule for car loans. According to CarsDirect, most banks don’t charge late fees on car payments until they’re 10 days overdue. The Center for Responsible Lending says a typical late fee for a $300 car payment is $15. However, fees can vary widely, so it’s important to check your contract. Also, be careful about letting your loan go unpaid for longer than 30 days. At that point, the lender could repossess your car.

5. Deal with debts

Instead of simply putting off paying your bills, you can try to negotiate with your creditors and see if they’ll give you a break. They don’t want to see you file for bankruptcy, because if you do, they lose everything.

Next week:
Part V-Clearing up debts

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