Alternatives to Payday Loans

by Mike

This is a guest post from the folks at MoneySuperMarket.com

In some circumstances payday loans can be an effective solution to a short term cash flow problem, but you should consider alternatives, especially low interest loans which will always be better for medium to long term needs.

A payday loan is simply a cash advance, given on the expectation that you will repay the amount, plus interest, as soon as your next pay check hits your bank account.

This type of loan could be used to pay for something completely unexpected, such a garage bill or vital repair work in your home. The amount borrowed is usually between $100 and $1000.

These loans are strictly for short term borrowing needs but are popular. In the US, it’s estimated that more than 10 million customers have taken out payday loans, totalling billions of dollars.

The loans don’t have any impact on your credit rating, nor are they secured against your home. You don’t even need to give details of why you’re seeking the loan.

Typically, payday loans are made available either immediately or within a day. And even if you’ve got a bad credit history, you are still likely to be accepted for one.

However, there is a price to pay for the relative ease of getting a payday loan and that comes in the form of a very high interest rate. The rates typically charged would have equivalent annual rates of around 1300% or more.

In the short term, this may not prove too painful, but only if you pay back the amount borrowed within the stipulated time frame, usually 31 days. For example if you borrow $300, you’ll need to pay back $375, including the interest.

A payday loan is not suitable if there’s any chance you won’t be able to pay back the amount within 31 days. Interest charged will quickly start to pile up and some providers make additional charges to extend the loan period.

Taking out a payday loan without the certain knowledge that you can repay it in full and on time will almost certainly make an existing financial crisis significantly worse. These are definitely not low interest loans.

Other ways of dealing with a short term cash problem should be considered. You could use the overdraft facility on your bank account if you have one in place, or you could put the new expense on your credit card.

Credit card interest rates are much lower than those quoted for payday loans, usually around the 17% mark. Most credit cards offer an interest-free period for purchases, usually up to 56 days. If you repay the balance in full by the date stipulated on your statement, you won’t be charged any interest.

If you have an overdraft facility in place on your bank account, check the interest rate carefully. There is a big variance in rates and if you are regularly overdrawing on your account, you should make sure you’re getting the best deal you can.

It is a good idea to arrange an overdraft facility with your bank, just in case you need to use it. Many banks charge higher interest rates for unauthorized borrowing and may levy extra penalty charges if you overdraw without authorization.

Credit unions are another source of low interest loans and may provide a welcome solution to a financial crisis in the short, medium or long term. These are cooperative financial institutions, owned and controlled by their members and are geared to providing credit at very competitive rates.

A Payday loan can be a useful way of getting a quick cash injection when you really need it. But you must be absolutely sure you can repay the loan and the interest within the short time frame allowed. If there are other ways in which you can free up cash to meet an immediate need, such as using an overdraft or a credit card, or borrowing from a credit union, these may prove more cost effective.

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