How payday loans work – biggest dangers and 14 better alternatives (part 5)

July 18, 2019

In some cases, creditors will accept a lump-sum payment for just a part of what you owe. In other cases, they’ll work out a payment plan with you so you can make repayments bit by bit. Then you can use the money you save on these bills to cover other expenses that are more urgent. There’s no guarantee lenders will work with you, but you have nothing to lose by asking.

If your creditors aren’t willing to work with you directly, you can try to deal with your debts in other ways. Some options include:

1. Credit counseling.

A credit counselor can help you set up a debt management plan, or DMP. Under these plans, you make monthly payments to the credit counselor, and it pays your debts for you. In some cases, a DMP can reduce the interest or penalties you’re currently paying. However, DMPs also come with a setup fee and a monthly maintenance fee, which could cost you more in the long run.

2. Debt consolidation loans.

Sometimes, you can make overwhelming debts more manageable by taking out a debt consolidation loan. These loans roll all your existing debts into one loan with a lower interest rate. This gives you fewer bills to keep track of and a more manageable monthly payment. Interest rates on debt consolidation loans range from 5 percent to 25 percent APR. On top of that, these loans often include an origination fee of 1 percent to 6 percent of your total debt (SoFi doesn’t charge origination fees and have some of the lowest interest rates available).

3. Debt settlement.

Debt settlement companies negotiate with your creditors on your behalf. Their goal is to get lenders to settle for a lump-sum payment that’s less than what you actually owe. You pay off this settlement by putting aside a fixed sum into an account each month, just as you do with a DMP. However, debt settlement companies often charge high fees for this service. Also, they often encourage you to stop paying your bills while they work toward a settlement. That means that if the settlement doesn’t work out, you’ll owe several late fees, leaving you in a deeper hole than ever. And if you do manage to get your debts settled, the Internal Revenue Service treats the amount of forgiven debt as income, so you have to pay taxes on it.

4. Sell or pawn your possessions

If you need to raise cash in a hurry, try cleaning out your closets. Look for high-value items that you can sell, such as:

• Jewelry (such as an engagement ring)
• Electronics (new or old)
• Musical instruments
• Unused tools
• Collectibles

If you have a store in your town that deals in these kinds of goods, try going there first. If not, you can try selling your belongings on eBay or Craigslist. Check other listings for similar items first to get an idea how much your stuff is worth.

Another option is to take your stuff to a pawn shop. You can sell your items outright or borrow money on them. When you take out a pawn shop loan, you hand over your item as collateral, and the shop gives you a fraction of its value in cash. You also get a receipt, called a pawn ticket, that shows when your loan is due.

A pawn shop loan is usually good for anywhere from one to four months. Any time before that period is up, you can take your ticket back to the store and pay back your loan, along with a fee that can be described as either interest or a finance charge. Fees range from 5 percent to 25 percent of the loan value per month. That adds up to 61 percent to 304 percent APR, which is high, but better than you’d get from a payday lender.

If you can’t pay off a pawn shop loan before it comes due, the shop just keeps your stuff and sells it to someone else. That’s not great for you, since it means you’ve sold the item for a lot less than it was worth. But at least that’s the end of the story. Your loan is paid, and you don’t have to worry about debt collectors coming after you.

5. Collect your paycheck early

Instead of getting a payday loan to get you through to your next paycheck, determine whether you can just collect your pay a little early. If you work for a large company, go to human resources and ask whether you can get an advance on your paycheck. If you work for a small company, approach the owner.

A payroll advance isn’t the same thing as a loan. Typically, when you get an advance, you’re just collecting the money for work you’ve already done. So, for instance, if your pay period is two weeks, and you’ve worked one week since your last paycheck, you can collect half of your next one.

However, a payroll advance can hurt you as well as help you. Taking an advance means your next paycheck is going to be short, so you’ll need to pay your usual bills with less money. If you can’t, you might have to go back to your boss for yet another advance and end up falling further behind. To stop this from happening, many employers limit the number of advances you can take to one or two per year.

Companies can have other rules about payroll advances as well. Some only grant them to employees who have been employed for a certain amount of time. Others ask you to show that you need the money for an emergency expense. Sometimes, employers offer short-term, low-interest loans instead of advances.

Next week: Part V-Clearing up debts (Continued)

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