Basics of Small Personal Loans

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As the pandemic enters its fifth month, eviction moratoriums expire and the extra $600 in weekly federal unemployment benefits have come to an end. This left many in a difficult situation. According to a NextAdvisor survey, more than half of U.S. households that received the extra $600 had no plans for what’s next as high unemployment persists.

If you’re struggling to cope, it’s important to understand the options available to you. Options like payday loans can make things worse for you.

Payday loans are basically an advance on your next paycheck. You borrow an amount usually less than $500 and the loaned amount is repaid on your next paycheck, often with a very high interest rate.

While some states outright ban payday loans or limit interest and fees, most do not. That means it’s not hard to end up with a payday loan with an APR, or annualized interest rate plus fees, of almost 400%. That’s over 25 times the APR you’d pay on a typical credit card.

To make matters worse, the Consumer Financial Protection Bureau just ended a rule requiring payday lenders to verify a borrower’s repayment capacity before granting a loan. This makes it even easier for someone trying to make ends meet to get into debt with a payday loan.

Fortunately, there are ways to access small amounts of money without paying extremely high interest and fees. Here are some options to consider before turning to a payday lender.

What to do when you need a small loan

If you’re having trouble paying your bills on time, take a step back and assess the situation. That can be the hardest part, especially now, says Tara Alderete, director of education and community relations at Atlanta-based nonprofit financial advisory firm Money Management International. Alderete recommends starting by separating your spending into wants and needs. If you miss something, wait and save to make the purchase.

When it comes to needs, you may be able to find help outside of a loan. Many local charities and government organizations offer help if you are struggling to pay for necessities, such as food, utilities, or medical bills.

But after applying, it can take up to a month to receive some government benefits. If you need more immediate assistance, you can call 211. An operator can put you in touch with local charity offices, like United Way or the Salvation Army, which may have quicker turnaround times .

Remember that you can exercise your mortgage forbearance options or make payment arrangements with your creditors before borrowing money with interest.

Looking ahead, Alderete advises individuals to lay the groundwork to better prepare for similar situations in the future. Taking care of your credit and creating an emergency fund will give you more options when you need cash fast.

Pro tip

Instead of a payday loan, consider other options first. A lesser-known alternative is the Alternative Payday Loan (PAL) – a more affordable option through a credit union with lower interest rates than a payday loan.

Alternatives to payday loans

It may be ideal to set up a budget and an emergency fund to eliminate the need for a small loan, but the reality is that emergencies do happen. And sadly, experiencing the worst pandemic in a century doesn’t excuse us from keeping the car running and the lights on.

Whenever you borrow money, pay attention to the fine print, so you know what you’re agreeing to. Consider not only the interest rate, but also the fees and what will trigger them. Understand what, if any, loan origination fees and prepayment penalties are attached to the loan, which can unexpectedly increase your costs. Make sure you understand the repayment terms, so you know exactly what you’ll owe and when it’s due.

Here are some options that, while not always ideal, are better financial decisions than taking out a payday loan.

Unsecured personal loan from a bank, online lender or credit union

Getting a personal loan from a bank could be a decent option, but rates vary widely depending on your credit score.

It’s complicated right now because credit is very tight, says Greg McBride, chief financial analyst at Banks are currently more reluctant to provide even small personal loans if you have bad credit. And if you have a lower credit score, you’ll end up with a higher interest rate.

If you don’t have great credit, your options for getting a small amount of money quickly and with a decent interest rate may be more limited. But having a pre-existing banking relationship is helpful, especially with federal credit unions. If you’ve been a member of a credit union for at least a month, you can apply for an alternative payday loan (PAL), Alderete said. These loans are typically $200 to $1,000 and have much lower interest rates than traditional payday loans.

However, the interest can usually vary between 28% and 35%, which makes some credit cards a better alternative.

Credit card

We don’t recommend putting expenses on a credit card if you can’t pay them off each month, but even credit card interest and fees can be more manageable than what you’ll get with a payday loan. . At the start of 2020, the average credit card interest rate was 15.09%, while the average APR for people with poor credit was close to 23.5%. Some credit cards have 0% APR promotional periods that you may qualify for. It is important that you check the APR of your card before choosing this option.

With many credit cards, you also have the option of taking out a cash advance. But a credit card cash advance is even more expensive than carrying a monthly balance. Interest rates on cash advances are almost always higher and you’ll start paying interest from day one. (With a typical credit card purchase, you won’t pay interest until the end of the billing cycle.) So only take a cash advance if you can’t pay your emergency bills with a card and you have no other options than a payday loan. .

Concert work

If you have the time, there are ways to find work that fits your schedule. Alderete says apps like DoorDash, Instacart, and Amazon Flex offer a chance to earn quick cash on your schedule.

Gig work can be a great way to build up your savings, but you may have to wait up to a week to get paid. Also, while bike delivery is available in some cities, most gig work requires a reliable vehicle. And while many delivery services are seeing increased demand, many unemployed and underemployed people are signing up to work for these companies, making it harder for everyone to earn a decent living.

Withdraw from your retirement account

Depending on the retirement account you have or the type of expenses you need to pay, you can take out a loan or make an advance payment. Usually, early withdrawals from your retirement account have fees and tax implications. This is in addition to the potential return on your investment that you would miss.

But, if you only need a small amount of money, it’s not the worst option.

If you’ve been struggling financially because of the pandemic, it’s now easier to borrow from a 401(k) account. Congress passed the CARES Act in March in response to the hardships faced by financially impacted Americans. It has a provision waiving additional fees and taxes on 401(k) loans. If you qualify, you will still have to repay the money within three years. Otherwise, it will be considered taxable income.

Other loan alternatives to watch out for

Besides traditional payday loans, there are other loan options that you’ll want to avoid in most situations. These options have terms similar to a payday loan or carry their own risks.

Payday Advance Apps

Depending on your job, you may be able to get a payday loan for hours you’ve already worked but haven’t been paid for using a payday advance app. You will need to verify your employment and income, and many payday advance applications must be set up by your employer.

At first glance, these apps appear to be less harmful payday loan alternatives. For example, some do not send collection agents after delinquent accounts or do not authorize loan renewals. Instead, you won’t be able to borrow any more if your loan isn’t repaid.

One popular app even offers an optional “tip” feature instead of interest or fees. While no interest is nice, even a $4 “tip” on a two-week $100 payday advance is a triple-digit APR. Also, most of these apps require access to your bank account so that they can automatically withdraw the money you have borrowed. This puts you at risk of incurring overdraft charges if the withdrawal exceeds your account balance.

All in all, a payday advance application is not a long-term solution because you’re still taking money out of your next paycheck. With less money available in the future, it’s easy to create a cycle of using payday advance applications, just like with a payday loan. A handful of states are investigating these apps for predatory lending practices. And some have accused them of being essentially a payday lender, under a different name, in an effort to circumvent lending regulations.

Secure loan

Secured loans often have better interest rates and may be easier to obtain than unsecured loans. This is because the loan is “secured” by an asset you own, and if you can’t repay, the lender can take your collateral.

While a secured loan is safer for the lender, it is riskier for you.

Secured loan options include home equity lines of credit (HELOC), auto title loans, and pawn loans. If you’re struggling with your bills, putting your house or car on the line could make a bad situation worse.

With a pawnbroker, you may not be putting something essential to your survival on the line, but you’re usually getting a bad deal. You’re going to get pennies on the dollar of what the asset is worth, McBride said of pawning your valuables. So you may not be able to borrow as much as you think. And if you don’t repay the loan, plus fees, within the agreed time, you lose the object.

About Judith J. George

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