Everything You Wanted To Know About Pitfalls With Payday Loans And Alternative Financing

By David Miller

It is a well-known fact that payday loans are quite expensive. Lenders charge an interest rate of up to several hundred percent. For instance, borrowing $100 may cost you $20 in fees over a period of just two weeks. This doesn’t seem like much, but what about borrowing $1,000 – it will involve considerably higher interest charges, right? On average, you will pay at an annual percentage rate of around 430 percent.

One issue with these loans is that they are not a solution to your financial hardship. If you have financial problems, taking out a payday loan can only make things worse. Given that these loans are offered with a very high interest rate, your expenses increase. A payday loan can only work well as part of a short-term strategy. It makes sense to take out a payday loan as to cover the cost of an urgent car repair, for example. Then, if you are into the habit of taking out cash loans, this is likely to put you under. Financial institutions and retailers may be unwilling to deal with such borrowers. Moreover, you financial institution may take steps to sue you, or your account may be sent to collections. This will affect your credit score.

What are the alternatives to payday loans? One is to open a savings account and use it as an emergency cash fund. And why do you need one? Persons who do not have savings may have to take out a payday loan or another loan with an unfavorable interest rate and terms. Having a fund gives you flexibility and makes it possible to fix the problem quickly. You have more options to choose from with cash on hand. Money markets and savings accounts are good places to keep cash as it has to be liquid. Your emergency cash should be easily accessible, that is – without delay, cost, penalty, or risk. Of course, you should think of how much is enough (how much to stash). Here, it is important to save enough to make you feel secure. In general, you should have enough money to cover between 3 and 9 months of your living expenses.

Building a good credit score will make it possible to apply for loans with the mainstream lenders. There are different ways to go about this, be it by obtaining a department store or a secured credit card. You should borrow in moderation and make on-time payments. You may want to apply for a signature or unsecured loan with some bank or another financial institution.

If borrowing is not an option – even from friends and relatives, you may want to pick up a second job as to increase your income. This is another way to build an emergency cash fund. Finally, if you have accumulated excessive debt, one option is debt modification.

Learn more about credit cards and how to do a credit card search.

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