Best Alternatives to Pay Day Lending for Businesses
A payday loan is a short-term loan in which a lender extends credit at a high-interest rate dependent on your income. Its principal is usually a percentage of your next paycheck. Payday loans have high-interest rates since they are used for short-term, emergency credit.
Why Look for Alternatives to Payday Loans?
Payday loans are dangerous because of their high-interest rates, but renewals offer greater risk. If you cannot repay the loan by the due date, the Consumer Financial Protection Bureau advises that several states permit payday loans to roll over. In this situation, you would only pay the loan costs while the due date was extended. You’d be charged a renewal or rollover cost, as well as a possible late fee, and you’d still owe the initial amount. This is what creates a vicious cycle of pricey debt.
The good thing is that if you’re in a financial bind, payday loans aren’t your only choice. Here are some alternatives to payday loans to think about.
Alternatives to Payday Loans
Following are the alternatives to payday loans-
1. Seek Credit Counseling Services
If someone is not able to reach an agreement with your creditors, consider working with a non-profit credit counseling organization. A licensed credit counselor can help you set up a debt management plan. The counselor negotiates with your creditors to lengthen your repayment periods, cut your interest rates, and waive fees so that you owe less money each month. You then make a single monthly payment to the credit counseling agency, which pays your creditors on your behalf.
A credit counselor may also help you create a budget, provide advice and tools for managing your debt, and provide extra knowledge and resources to help you get your finances back on track. These services are frequently offered for free or at a low price. You won’t have to borrow money to cover your essential costs this way.
2. Consider Obtaining a Payday Alternative Loan (PAL)
Payday loans are available from credit unions that are members of the National Credit Union Administration (PALs). Lower-cost PALs provide borrowers with more time to repay a loan than payday loans. You might use the money from a PAL to prevent or pay off a payday loan.
A credit union may charge a PAL application fee of up to $20. The PAL amount can range from $200 and $1,000, with a payment term of one to six months. A borrower may get up to three PALs in six months, as long as no PAL overlaps or rolls over.
See Also: How To Stop Recurring Payments At Banks
3. Consider a Credit Card Cash Advance
The interest rate in a credit card cash advance is often lower than a payday loan. However, keep in mind that the APR for a credit card cash advance may be greater than the APR for purchases on the same credit card. A fee may assess if you withdraw a cash advance (3 percent or 5 percent of the amount borrowed is common).
However, be wary of the possibility of increasing your credit usage (which might harm your credit) and accruing significant fees and interest charges.
4. Borrowing from Family and Friends
If someone is in a tight spot financially, a family and friends loan might be a fantastic option to avoid a high-interest payday loan. You could even be able to borrow money with no interest.
Put your loan arrangement in writing, regardless of the interest rate you choose. This contract should state the amount borrowed, the interest rate or collateral utilized, the payout time, and the payment amounts and due dates.
Failure to return this form of loan will not harm your credit. But it may result in legal action and a lost friendship or strained family situation.
5. Investigate Lending Circles
As a part of a lending circle, you may borrow money for free from other individuals to pay off high-interest loans, cover emergency needs, buy a car, and so forth.
A lending circle has six to twelve persons. Loan amounts range from a hundred dollars to several thousand dollars. One of the most well-known lending circles is run by Mission Asset Fund.
See Also: Cash Flow-How To Maximize Your Cash Flow
6. Use Your Credit Card Wisely
Another option for avoiding the high-interest rates and costs associated with payday loans is to utilize a credit card correctly. This implies that you should only use your credit card for items you can afford to pay off on or before the due date. Paying your bill in full on or before the due date will help you avoid interest costs, late penalties, and significant credit score loss.
In addition, if you have a credit score of 700 or better, you may be eligible for a credit card with a 0% APR. This card has an interest-free promotion term of up to 21 months. You can avoid interest if you pay the sum owing before the promotional period finishes.
Pick a different financing option from this list if you want to avoid the increasing expenses associated with a standard payday loan. Compare each option and decide which is best for your particular scenario. The most cost-effective choice for which you qualify is most likely the best one for you.
Payday loans are simple to obtain, but the cost of convenience can be high. There are several choices to consider. Prior to applying for an alternative to a payday loan, you should receive your free credit score and free credit report to understand where your credit stands. This might help you reduce your alternatives and increase the likelihood that your application will be granted.
See Also: How To Turn Lean Six Sigma into Cash?