How To Avoid Payday Loans
I need money fast.
I need money to pay my bills now.
Where can I borrow money ASAP?
Do any of the statements above sound familiar? If so, you may have considered a payday loan to help you deal with a financial emergency at some point.
Until you build an emergency fund, you may need to borrow money when a financial emergency arises. That’s understandable. It’s also understandable that you might feel desperate and not know where to turn.
Although you need to borrow, it’s best to avoid options that could get you into trouble. A payday loan, for example, is one of the worst financing options you can choose.
How Does a Payday Loan Work?
A payday loan is a short-term loan that you’ll typically have to repay with your next paycheck. The loans are referred to as “small dollar” loans because they’re often around $500 or less. Because payday lenders are willing to issue loans to people with credit problems, they’re a popular option for many who need quick access to cash.
One of the main reasons I’m against payday loans is because they’re an expensive way to borrow. In some states, the APR on payday loans can climb as high as 600% or more.
Many people take out payday loans in a moment of desperation, but can’t afford to pay them back when their next paycheck arrives. In some states, borrowers can roll over or refinance their loans (for a fee, of course). After a while, this can turn into a vicious cycle that the Consumer Financial Protection Bureau (CFPB) calls a “debt trap.”
How to Avoid Payday Loans
1. Find an Alternative
If an emergency comes up and you don’t have funds to cover it, your goal should be to find the best solution available. Instead of jumping into a costly payday loan, you might consider one of the following solutions.
0% APR interest rate credit card offers [1] can be an affordable, short-term solution to a financial emergency. But be cautious. Using credit cards to borrow money can snowball into a big problem if you don’t manage the debt carefully.
A low introductory-rate credit card isn’t the right fit for everyone. When should you avoid a 0% APR credit card? Here are a few instances where filling out a new application might not be a great idea.
- When you have low credit scores or other credit problems, you may not qualify for attractive 0% APR credit card offers.
- If you can’t afford the payments on a new credit card, taking on new debt isn’t wise.
You’re better off avoiding debt altogether. But if you have to borrow money for a financial emergency (and you can afford to repay it), a new credit card with 0% interest may be one of your better options.
Consider a paycheck advance with Earnin. With the Earnin app, you can borrow up to $100 per day ($500 max) from your upcoming paycheck. The catch is that advances are only available for the money you’ve already earned.
Earnin doesn’t charge fees, but you have the option to tip up to $14 when you withdraw funds. When your direct deposit hits your bank account, Earnin deducts any money you received as an advance.
Check with your local credit union. If you find yourself in a situation where you can’t qualify for a 0% APR credit card offer, and a paycheck advance isn’t enough, a payday alternative loan (PAL) might be a better fit. PALs are available from many credit unions, even if you have credit challenges. You might be able to borrow up to $2,000 if you qualify. The APR on PALs can climb as high as 28%. Yet that still beats a payday loan if you’re in a pinch.
2. Work on Your Budget
Once you’re past your financial emergency, it’s crucial to find a long-term solution for your finances. You need a plan to pay off the new debt you created and manage your spending and saving moving forward. You need a budget.
I get that it can be tough to start a budget when you’re living paycheck to paycheck. But a budget can help you even when finances are tight. If you’re struggling to make ends meet, you may need a budget more than ever.
The Budget by Paycheck Workbook is a great tool that can help you take control of your finances. From tracking spending to paying down debt to saving more money, this workbook has it all.
The Budget by Paycheck method changed my life. I tried (and failed to stick with) many budgeting methods in the past. So, I created a method that took the elements of other budgeting plans I had success in and combined them into something new. Since I created the first Budget by Paycheck Workbook in 2016, I’ve gone from being over $77,000 in debt to being 100% debt-free.
Not only do I get to enjoy the freedom of having no debt, but I’ve also set up savings funds for emergencies, retirement, vacations, and more. The combination of owing zero debt and having money in savings has reduced my financial stress level more than you can imagine.
3. Create an Emergency Fund
A helpful way to avoid payday loans and unplanned expenses, in general, is to build an emergency fund. Initially, you can set a smaller savings goal, like $1,000. Eventually, build an emergency fund that will cover three to six months of living expenses. Tricks, such as automating your savings and opening a separate online savings account, can make reaching your goal easier.
Remember, a successful budget and saving money go hand in hand. Without a plan, you might have good intentions to save, but may never actually see your goal through to completion.
Bottom Line
Financial emergencies happen. While it’s smart to plan for a better tomorrow, don’t beat yourself up for where you are now.
Yes, you should work hard to pay down your debt, fix your budget, and build an emergency fund. These three steps could improve your life. But give yourself a little grace in the meantime.
Celebrate small successes as you strive to live a life you love on a budget that you can afford. And be sure to connect with me on Instagram so I can support you on your budgeting journey.
