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Payday loan alternatives also costly

[Aug 12, 2011.]

 

Instant payday loans have a negative reputation among many people because of the perception that these loans come with an exorbitant interest rate. In addition, many consumers who take out one payday loan and then cannot repay it when it is due end up with too many payday loans.


If you are using short-term payday loans regularly, you should view this as a sign that your budget is not working. Either create a personal spending plan on your own that allows you to save even a little bit of money from each paycheck while still paying your bills, or consult with a credit counselor who can help you make a plan. Try the National Federation of Credit Counselors (http://www.nfcc.org/) to find one in your area.


In the meantime, if you face a financial emergency, consider your alternatives to a payday loan such as taking an advance on your salary or borrowing from friends or family members. You should know, however, that the Consumer Rights Coalition researched short-term credit alternatives to payday loans and found that many of them were actually more expensive than instant payday loans. The catch with payday loans is that you must be able to repay them within the first loan period (typically two weeks), otherwise you will end up paying significantly more in interest and fees.


Payday loan alternative costs for a $100 transaction (Source: Consumer Rights Coalition)



  • Overdraft fee. $29 fee or 756 percent APR.

  • Credit card late fee. $37 fee or 965 percent APR.

  • Bounced check plus merchant fee. $56 for 1,449 percent APR.


According to the Consumer Rights Coalition, the fee for a $100, two-week payday loan is typically $15, which is about 391 percent APR annually.


In addition to the fees charged for these payday loan alternatives, there are potential consequences such as higher interest rates charged by credit card companies after too many late fees or unpaid bills. In some cases, an unpaid utility bill will mean the electricity, phone or gas will be disconnected and an additional fee will be charged for reconnection.


When faced with an emergency, you may find you don't have time to compare alternative sources of quick funds so you automatically turn to short-term payday loans. While that may solve your immediate problem, once the crisis is over, you need to resolve your long-term financial issues and develop the resources for future unexpected expenses.



 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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