Alternatives To Payday Loans

Posted on March 1, 2021 in Loans

Sometimes even the most prepared people will experience the least expected events and need money in a hurry. Whether it’s an unexpected medical procedure, car troubles, or the sudden loss of a job, there is just no way to fully prepare for the various twists and turns of life. Often when people experience any of these unexpected catastrophes and need money fast, they end up only making their situations worse by taking out risky and predatory payday loans. 

While payday loans are one of the fastest ways to get money, they are also one of the most dangerous options. You’ll want to fully understand the context first, including if a payday loan is installment or revolving. Hint: it’s neither. Furthermore, the interest rates are often several hundred times that of a standard loan. However, the ease and convenience, coupled with financial desperation, will make payday loans a popular option for people. Before you take one out, here are some quality alternatives to payday loans that could end up saving a ton of money in the long run.

Payment Plans

Depending on the financial crisis’s nature, making a payment plan may be the best option and will eliminate the need for a loan. Payment plans are especially effective for medical bills and large credit card debts. Many medical providers such as physicians, dentists, and hospitals will often help create payment plans for the bills they issue. The minimum monthly amount will depend on the total bill owed and the terms being negotiated. Typically, a bill will be split evenly into equal payments over the number of agreed-upon months. 

In cases of credit card debt, most card issuers offer hardship programs that can allow the cardholder to reduce or suspend payments temporarily for credit card debt. 

There is also the option for settlements as well. In this case, the cardholder will negotiate a settlement price — lower than the total amount owed — that both parties will find agreeable. This option may affect the card holder’s credit score, but payday loans are a much safer choice.

Personal Loans

While banks and credit unions often take an excruciating amount of time to make a decision on a loan, especially in times of financial crisis, they are still one of the best options for a quality loan. Personal loans can be applied to all kinds of specific expenses, but they are often used best for defined reasons such as auto or home repairs, debt consolidation, or medical expenses. Banks and credit unions are more comfortable when they know the details surrounding where the money would be going. Personal loans require a hard credit inquiry, which can lower a credit score by a few points, along with other financial details such as income and pre-existing debt. If the loan is approved, then interest rates and terms will be set. When it comes to interest rates, personal loans average around the middle of most loans. The average interest rate for a personal loan is currently 11.8% which is lower than some options but higher than others. Part of the reasoning for this rate, besides credit score and income, is that personal loans are unsecured loans. This means that nothing is offered for collateral, and so if a person has defaulted, nothing will be seized. The extra risk for the bank or credit union is paid back in terms of a higher interest rate. 

Most lenders will typically provide repayment terms for a loan ranging between six months and seven years, impacting both interest rate and monthly payments amounts. Once the loan is granted and the money is exchanged, there is generally a grace period of 30 days before the monthly installments will begin. These monthly payments are calculated by the total loan plus the interest rate and other potential fees, divided by the loan repayment terms. For example, a $10,000 loan with a 12% interest rate at 48 months would end up as roughly $233.33 per month. 

Personal loans can be found online as opposed to brick-and-mortar banks and credit unions. These loans can vary wildly in terms and conditions but can be very acceptable alternatives to payday loans. One thing to keep in mind is without personal interaction with someone, it can be difficult to fully understand the terms of conditions of the loan. It’s critical to make sure the details and fine prints are understood and acceptable before agreeing to it.  

Home Equity Loans

For anyone who owns a home and has made mortgage payments, there may be a home equity loan option. These types of loans are fairly common for large expenses such as college tuition or making home repairs or improvements. This loan will be the easiest way to get the most money like most other options listed here have much smaller caps on the total amount offered. These loans work because they create a sort of second mortgage that borrows against the equity of a home (more of that later) and uses the home itself as collateral. Equity is the difference between what is owed on a mortgage and what the home is currently valued. As someone pays down their mortgage, then their equity will rise.

Additionally, as a home increases in value, so does its equity. For example, if a home is valued at $300,000 and there is $175,000 remaining on the mortgage, then the home equity would be $125,000. That doesn’t mean that $125,000 can be borrowed in the form of a loan. The amount is generally limited to 85% of the home’s value, not equity, but will also factor in the first mortgage as well. So in this example, 85% of the home’s value is equal to $255,000. When the original mortgage of $175,000 is factored in, then the loan’s total possible amount becomes $80,000. That doesn’t mean the loan has to be this much or even that a person could qualify for that amount. 

Along with the details of the home, the homeowner’s income and credit history are also large factors involved. The benefits of home equity loans, besides the large potential total amounts, are the low interest rates. The average home equity loan is around 5.8% which is significantly lower than a lot of alternatives. However, the reason for the low rate is that the home is collateral. This means that failure to repay, known as defaulting, the loan could result in the home’s foreclosure.

Pawnshop Loans

This option is the quickest of the others listed but is also the worst in terms of interest rates. Still in the middle of an emergency, it can be the best option for anyone that needs money in a hurry and may not have good credit or own a home. The way a pawnshop loan works is that a person will take an item to a pawn shop and use it as collateral in order to secure a loan. The pawnshop worker will assess the value of the item, offer a loan amount based on the perceived value, and offer cash. Interest rates and terms will be decided, and if the loan is acceptable, then the item remains, and the cash goes. Once the loan and fees are paid back by the agreed-upon date, the item is returned. Failure to repay on time will result in forfeiting the item to the pawnshop. Interest rates can vary wildly between 12% and 240%, so it’s important to know the details before accepting the loan. Repayment times are typically limited to a month or less, but this can be negotiated along with the loan’s total amount. 

Best Alternatives to Payday Loans

Anyone in need of money would be wise to consider payment plans, personal loans, home equity loans, or even pawnshops before taking out a payday loan. Although these options come with risks, they are still much safer overall than predatory payday loans. 

Keeping your finances in check can be quite a difficult process especially in the event of highly unexpected expenses. With the wild twists and turns that come up naturally in life, it’s just a matter of time before someone will need financial help or relief with a payday loan program. The above items may be difficult, time-consuming, or stressful, but they should all be considered before taking out a dangerous and extremely risky payday loan. 

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