By: Yara Zakharia, Esq.
In today's world where credit-desperate consumers face a barrage of ads offering fast cash, shopping carefully and comparing offers take on added importance. The U.S. Federal Trade Commission recommends avoiding payday loan borrowing and opting for safer and less expensive loans. This is because the interest rate on a payday loan can vary from 300% to more than 1,000%. Even the lowest rates on a payday loan are 10 times higher than those on a small personal bank loan. Payday loan lender rates are also exceedingly higher than the relatively high interest rates of some credit cards.
There are many alternatives to a payday advance. Prospective borrowers should consider the following possibilities:
- A small loan from a local credit union
- An emergency cash advance from their employer
- A loan from family and friends, with repayment terms in writing
- A credit card advance
- A debt repayment plan with creditors
- Local consumer credit counseling - Instead of payday loan borrowing, borrowers could contact non-profit associations offering credit guidance. These exist in every state and are available at little or no charge. Some employers, credit unions and housing authorities also provide low-cost credit counseling programs.
- Additional time to pay bills - Another alternative to payday loan borrowing involves requesting from creditors more time for repayment. Borrowers should find out what creditors charge for such a service - as an additional finance charge, a late charge, or a higher interest rate.
- Overdraft protection - Rather than payday loan borrowing, those with insufficient funds to cover a check might wish to consider getting an overdraft protection on their bank account. In such circumstances, the bank pays the check, and the borrower is not charged returned check fees and insufficient fund fees.
When borrowing, consumers should be aware of loan sharks. Payday loan borrowing carries the risk of dealing with predatory lenders. Consumers should also research the credit offer with the lowest APR and finance charge.
The importance of budgeting cannot be over-emphasized. Proper budgeting is a financial roadmap showing borrowers precisely where their funds are going and providing them guidance on constructive spending, so that they will be able to save for the important things such as a college education, a new home, a car, or retirement. Realistic budgeting enables borrowers to keep track of their daily and monthly expenditures.
Some useful budgeting tips include the following:
1) Utilizing a good software program
This will simplify the budgeting process for borrowers by allowing them to print out graphs and reports from their home computer. Free PC banking and personal finance software is available at many banks. Some of the most commonly used budgeting programs are MS Money, Quicken, and MoneyDance.
2) Brainstorming ways to reduce expenditures in each category
Being thrifty pays off. Whether payday loan borrowing or otherwise, consumers should find ways to avoid unnecessary expenses since even the smallest purchases add up.
3) Building some savings
To avoid borrowing payday cash advance loans or resorting to other forms of borrowing, consumers should create an emergency cash reserve or build a savings account in which they make small deposits on a regular basis.
4) Paying off the credit card debt
Before considering payday loan borrowing or an emergency cash advance, consumers with several outstanding loans can benefit from a lower interest rate through debt consolidation or consolidating their loans into one single loans.
5) Considering investment options
Another budgeting option available to consumers is investing in mutual funds, savings bonds, stocks, or retirement plans offered by their company.
In conclusion, consumers should take heed of the fact that payday loan borrowing could drive them further into indebtedness. Alternative borrowing methods are available and recommended for those preferring, and wisely so, to weigh their options before making their final decision. It is equally primordial that consumers plan ahead to prevent financial emergencies by preparing a budget, which will help them track their income and expenditures as well as save. Consumers who practice realistic and effective budgeting will see the rewards in no time.
