We’ve all seen this scenario before. An unexpected expense comes up and you or someone you love is short on cash to cover the bills this month. They just need a little extra money until payday to help them get over the hump. If this sounds familiar, you might be or know someone who is one of the 78% of Americans living paycheck to paycheck. Most research suggests household income has grown over the past decade. Despite this, household income growth has failed to keep pace with the cost-of-living increases over the same period. This has forced nearly 71% of americans, regardless of income level, to report that they are “in debt” according to CNBC. In response to monthly shortfalls, many African Americans have turned to “payday” lenders, to help them close the gap between what they earn and what they owe. Despite the promise of simple, “fee free”, short-term loans, many of these lenders have been in the news in recently because of their unfair terms and absurd fees. When faced with an emergency, we know it might seem that your only choice is a payday loan. It’s not. We’ve found three alternatives that are both less expensive and less risky than payday loans.
- Negotiate, Negotiate, Negotiate. It might seem hard to just be honest with your landlord or the phone company, but in our experience, this is always the best path. You might be negotiating from a position of strength if you are proactive about the problem. Your landlord or the utility company might be be willing to work with you to alter your payments, or even defer a payment if you have a strong track record with them. If that doesn’t work, the fees they charge for late or incomplete payments are often lower than those you might incur from a payday lending company. If this is truly a short-term cash flow problem, than this could be your best option. If you’re going to negotiate, the key is to do it fast. Once you miss a payment or two, your landlord or utility company will be less likely to be sympathetic.
- Family or Friends. If you’re comfortable admitting your money problems to family or friends, (hint: you should be), a loan from them might be the best answer to your cash flow problem. Everyone doesn’t have access to friends or family with the money to loan them, but despite this, we start here because you’ll have to tell them the truth about your situation and they are likely to hold you accountable to improve your spending and avoid this issue altogether in the future. This payday loan alternative is best because it is typically interest free and you’ll never hear the end of it if you don’t pay it back. Obviously, this will depend on the type of relationship you have and how often you have “short-term” cash flow problems, but it still could be a good option. To alleviate any issues, it could be good to offer to pay the loan back with interest or some other provisions that will serve as a show of good faith. While this option might be the most financially advantageous, but it is also the most tricky, so be very thoughtful about who you ask and how you treat them.
- Payday Alternative Loan (PAL). In response the crisis of payday lenders, the U.S. government created PAL. A PAL is the ideal alternative to a payday loan for anyone with current debt and a poor credit score. PALs are backed by the U.S. Government and available through National Credit Union Association members. In order to qualify, borrowers must be members of a federally recognized credit union for at least one month, sometimes more. PALs are designed to help potential borrowers avoid the trap of payday loans. PALs often offer important features such as, Loans between $200 and $1,000, six month repayment periods, low processing fees (up to $20), and generally lower interest rates. Despite the federal government backing, PALs must be repaid by the payment date, no exception, and cannot be rolled over or transferred. There are also limits to the number of PALs you can open in any 6-month period.
Needing to borrow money last-minute is never ideal. That said, life happens and sometimes we all need a helping hand. The key to avoiding “short-term” cash flow problems from becoming a lifelong debt trap is to borrow smart and avoid the high cost, hidden fee ridden payday loans.