Companies offering online short-term payday loans at high-interest rates have been accused by Welsh Assembly members of “sucking money” from poor communities. The Wales government has been encouraged to work with councils and volunteer groups to promote alternatives to payday loans.
Members of the Assembly expressed concern that it is becoming easier to borrow online payday loans through websites and smartphones. However, the industry officials said they weren’t targeting the poor. Online payday loans are designed to keep people calm for short periods of time.
How Do Payday Loans Online Work?
Let’s say you urgently need money and are considering taking online payday loans. Your electricity was cut for non-payment, or a seal exploded in your car. Your savings account is empty and you think your credit rating is too low to qualify for a payday loan offering a bank loan or title loans. You won’t get paid for another 10 days and you decide to take a payday loan to see you through.
If you live in a state where lenders offering online payday loans are allowed, you can visit a physical location or go online. Payday lenders make this easy. All you need is your ID, a payslip (or other proof of work), and a date stamp. You tell the lender how much money you want, write a check covering online payday loans and commissions, and put the checkoff for two weeks. If you can’t pay your loan on time, you may have to take out another payday loan online to cover the first.
Every time you take out a new loan interest and commissions build up making it difficult to pay off your debts. To make matters worse, research by The Ascent found that you can end up paying 400% or more in interest and commissions on your loan. To put this in context, the average credit card interest rate is around 15%. Let’s say you borrow $ 500 for 14 days and the annual interest rate is 400%. On the 14th day when online payday loans are due, you will be required to pay an initial $ 500 plus $ 77 in interest. Very often people cannot pay off all of $ 577 and have to take out another loan. Then you start paying interest on interest.
Alternatives to Payday Loans Online
Payday loans are usually $ 500 or less. Getting your hands on a few hundred dollars can be tricky. Still,some alternatives can help you avoid debt altogether. Here are some of your best options:
Sell High-Value Ticket
If you have a very expensive car or have a bicycle, power tool, computer, telephone, or furniture in good condition, you can sell it and use the proceeds to avoid online payday loans. Take great photos of the product, offer it at a reasonable price, and post it on multiple sites and social networks to present them in the best light. When someone contacts you, be ready to respond immediately to increase the chances of an actual sale.
Extend Term Accounts
If payday is able to solve your financial issues in a couple of days, you may be able to negotiate an extension of your payment. Many lenders, landlords, and utilities may be willing to waive your fees or offer other concessions if you actively negotiate with them. Remember, they need your money and it is better to be a few days late than ever avoiding online payday loans.
Take a Personal Loan From a Bank or Credit Union
If you have good credit, you can qualify for an unsecured predator loan at a bank or credit union. According to the Federal Reserve, the average interest rate on 24-month physical loans is currently 9.50%. Credit union members can also apply for a payday loan alternative (PAL). These are small ($ 200 to $ 1000) short-term (1 to 6 months) loans like online payday loans but they come with much lower interest rates and commissions.
Borrow From 401k
Taking out a 401k loan is not an easy decision as you will essentially be borrowing money after you retire. You will lose compound interest as long as the money is withdrawn. Furthermore, you will incur taxes and fees if the money is not returned within the specified time period (usually 5 years). However, 401 thousand loans have their advantages. You don’t need to go through a credit check to get it. Interest on the loan is paid to you but not the lender.
Why Online Payday Loan Alternatives Suck?
Payday loans come with high commissions and interest rates of over 300 percent. Take a look at the list of payday loan laws by state for the maximum interest rate that lenders can charge. Check out some of these conditions:
- Alabama – 17.5 percent;
- Colorado – 20 percent of the first $ 300, 7.5 percent of the remainder;
- Louisiana – 16.75 percent.
These interest rates may not sound excessive as they are similar to credit card rates. Credit cards indicate the amount you will pay over a year while online payday lenders collect interest in just a week. If you calculate the annual rates as above, you pay three-digit interest. For example, Florida law only allows 10 percent interest plus a $ 5 fee on loans between seven and 31 days. Do this within a year and you can pay almost 400 percent.
When a loan is extended, then this is called an extension. Therefore, the commissions do increase. Lenders allow customers to renew their loans until the next payday if they pay the commission and accrued interest. Borrowers are trapped in a commission and interest cycle because they do not pay the principal. According to a Pew report, fewer than 2 in 10 borrowers can afford to pay off the average loan when it falls due. The report says it takes borrowers on average five months to pay off a loan paying $ 520 in finance fees on loans with an average of $ 375.
What Should Be Considered When Choosing an Online Loan Offer?
Online installment and payday loans require a thoughtful decision to avoid falling into a debt spiral. First of all, don’t ask for more than you really need. Check the following:
- APRC (it is not enough to check only the interest rate as the APRC indicator also provides information on other expenses);
- additional costs (costs associated with deferred repayment);
- the ability to reschedule the maturity date and associated costs.
Always read the terms of the contract carefully. If something remains unclear, talk to a consultant who can explain the points of interest to you. All you have to do is enter the loan amount and select the repayment period and the current% of the offer will be displayed.
About the author
Frank Glemstone – Frank is a graduate of the Master’s program in Economics Sciences. He has written numerous articles about personal finances and wealth. Working as the main author for MoneyZap he is now connecting with clients across the country, helping them achieve their financial and life goals.