Short term loans are often extremely risky due to to the very high interest rates incurred in short amounts of time, so a few payday loan alternatives can be availed of in order to avoid any financial pitfalls or long periods of debt. The risks presented to borrowers can be quite substantial with some payday loans, especially in states where these kinds of loans are not regulated or overseen by established governing bodies.
Oftentimes, places like credit unions, community assistant plans, or other place to avail of payday loans can be safer to borrow money from in the long run. Sometimes, simply borrowing money from a friend or family member can be a great payday loan alternatives and involves little to no extra cost when paying the loan back. It may depend on your immediate financial situation, but a payday loan alternative can be a lot safer than a payday loan itself.
What Is a Payday Loan?
A payday loan is a short term small cash loan used to cover expenses or debts by a borrower that cannot wait until his or her next payday. It is also known as a paycheck advance in some states. Money that is involved in a payday loan can either be in cash, or provided through credit or bank account by a lender depending on the loaning institution.
Payday loans are seen as very risky to the person borrowing the money because of the short term nature of the loan. This can be made even more dangerous to a borrower’s finances with the fact that loaning institutions are not overseen in some states or countries, and are outright illegal in others. Usury, the excessive and illegal bloating of interest rates, have put limits on Annual Percentage Rates that payday loan lenders may charge to borrowers in the states that allow payday loans.
The Many Payday Loan Alternatives
Other options are available to people who need cash advances before their next paycheck arrives, and can be safer than payday loans depending on the financial institution they inquire at. One of these alternatives include pawnbrokers who offer lower interest rates, but more stricter terms of loan repayment as the rates are already minimal.
Credit unions, which are cooperative financial institutions controlled by the members themselves, promote thrift and provide financial services such as credit or loans at rates comparably lower or competitive rates against banks and other mainstream establishments. These credit unions often promote community development, but can vary greatly in terms of assets and institution asset sizes.
The pro member nature of credit unions make availing of payday loans much safer and cheaper than banks or loaning institutions associated with banks. A wider range of loan services can also be part of some credit unions, and can cater to more than just short term financial problems or debts. The amount of services offered by these credit unions may also vary depending on the location and branch.
Oftentimes, these payday loan alternatives may not compare their interest rates to banks and other mainstream lending and loaning institutions, but to fees incurring in the penalties, late payments and overdrafts of a customer unable to pay back a loan in time. Again, these fees can vary greatly depending on the loaning institution, and can sometimes lead a person to fall prey to a payday loan debt trap.
Red tape and debt traps can often be bypassed by avoiding payday loans entirely. Borrowing money from a family member or friend willing to lend you cash can be a safer and more secure way of borrowing money without any interest rates or hidden fees involved. They can also be more trustworthy to deal with, and can often be more forgiving about debt repayment, giving better peace of mind to the person borrowing the money.
Myths and Legal Issues Surrounding Payday Loans
Payday loan alternatives may be sought because of the many laws and legal bindings that the government places on payday loaning institutions in some states. Some states have made payday lending outright illegal to practice, while others have placed restrictions on the amounts both the borrower may take out as well as the interest rates a lending institution may impose on the person borrowing.
The often ill effects of the absurdly high interest rates associated with short term loans like payday loans have been a subject of government scrutiny for some time now. In 2006, the U.S. Department of Defense labeled payday loans as “predatory,” and encouraged military families who have fallen into debt traps to seek payday loan alternatives. Some federal regulators of financial institutions have gone to great lengths to restrict payday loans, or even to ban them entirely. The high costs involved with payday loans are sometimes seen as very costly to middle and lower class citizens who are the top borrowers from payday loan institutions.
Automated databases and loaning systems may require licensed lenders to conduct real time verification of a person looking to borrow money, as the borrowers themselves are not the only ones who can be scammed. A person’s eligibility for a payday loan where it is legal can often involve looking at his or her credit ratings, crime record, and other credentials in order to assess the person’s ability to pay back a payday loan. This can also put off more honest customers into seeking other payday loan alternatives because of the red tape and bureaucracy involved.
August 20, 2020
A Chartered Financial Analyst (CFA)
There are a number of various lenders we apply