- If you've been struggling financially,
you might be tempted to walk into
one of those payday loan centers, or check cashing stores
that you've probably seen out and about.
The thing about payday loans
is that they come with massive interest payments,
and they could be highly predatory.
In this video, let's cover exactly what payday loans are
and some alternative options so you can avoid them.
(soft music)
Hey guys, welcome back to The College Investor,
investing and personal finance for Millennials.
So payday loans are often high interest,
short-term, no collateral loans,
so you don't have to put up anything to get the cash.
And typically, you're supposed to pay those loans back
within 15 days or less, or until your next payday.
Payday loans, unfortunately,
I just I hate this part of the financial world here,
they are so predatory,
their interest can rack up to nearly 400%,
are you kidding me?
When credit cards can range from 16 to 36%,
then you have payday loans that can charge
literally four times the amount on your original loan,
and get this, only 15% of new payday loan borrowers
manage to pay the loan off after two weeks.
So you've probably heard this,
"Oh, if you have bad credit, no credit,
you can come in and we're going to give you cash."
And you might be thinking this is your only option,
but that's just not the case.
There are some alternative options that you can look at
before you even think about payday loans,
think about these options first.
So your best alternative options to a payday loan
is to sell something, literally, let's go back
and take a look at what we have in our household.
Can you sell a big ticket item, like a piece of furniture,
a TV set, a power tool, something really valuable
that could get you that extra hundred dollars,
extra couple hundred bucks
that you are needing until your next payday.
Also solicit your services, you can do quick things
that are going to give you cash immediately,
such as lawn care, baby setting, house setting,
help run errands for a busy mom,
these are things that you can get cash immediately for.
So don't be afraid to solicit your services to friends,
family or your neighbors to help out.
The next thing you can do is negotiate
an extension on your current bills.
So take a look at the bills, and figure out
is there a way that you can work with your lender
and negotiate some of those terms?
Maybe you can get some waived fees,
maybe you can get the interest waived,
whatever it is, be proactive about your negotiation.
Then next thing you can do
is ask friends and family for help.
I know we don't like going to friends
and family when it comes to finances, it feels very personal
if you've never talked about money before,
but this could be your saving grace, and avoid you
from going into a really bad area with payday loans.
Another option is to take out a personal loan,
it often has lower interest
and more flexibility on repayment
or you could look at borrowing from your 401k.
Keep in mind, if you do that
and you don't pay the money back by that due date,
you could incur more fees and taxes on that money,
but the interest that you pay back on a 401k loan
goes to you, not the lender.
Okay, so we've covered
some alternative options to payday loans,
let's talk about some bad options
that you want to avoid just like avoiding payday loans.
So the first one is a title loan.
A title loan is where you put your car up as collateral.
Typically, these loans are 30 days in length.
So what you're saying is, I will borrow the money
and pay you back in 30 days, and if I don't,
you can keep my car, and this type of loan
imposes a real threat on car repossession.
And if you're a one car household, this is especially risky
and I would not think about the possibility of losing my car
over a couple hundred bucks.
The next one you want to avoid
is high interest installment loans.
In some states, this is legal
where they can charge APRs up to 100%.
And while that may be less than payday loans
that were charging up to 400%,
it's still one that you wanna avoid
because it's such high interest.
Another one to avoid are pawn loans.
So going to a pawn shop
and putting a valuable item up for collateral,
in exchange for a loan from that pawn shop
can be really risky,
especially if you are thinking of gambling
with something that's really valuable
and sentimental to you.
Also, if you don't end up paying that money back on time,
the pawn shop gets to keep
whatever item it was that you put up.
So instead of doing that, you could just go ahead
and sell that item on something like Facebook Marketplace
and get the cash right then and there,
and don't even think about doing it in terms of a loan.
So side hustling, cutting expenses where you can,
all of these things are really good
because it helps you avoid payday loans.
And also there are extreme situations
where you do need the money fast,
so let's cover some okay alternatives to payday loans
that could get you through.
The first one is to strategically delay your payment.
So take a look at all of your bills
and figure out which one absolutely needs to be paid,
and which ones you have to literally draw a line in the sand
and say, "I just can't pay this one this month."
And you really have to be strategic with this one
because some lenders or service providers
could come after you in this case,
but if negotiation is failing,
and you're really in dire straits,
this option, you might wanna take a look at.
The next option is default, defaulting on a debt means that
you are choosing not to pay it, the money is still due,
but you are choosing not to pay the debt.
This is another one where service providers
can come after you because legally you owe that money,
and it's not something to take lightly.
When you get in the cycle of high interest debt
and you keep defaulting on that deb,
and pushing it off, and it just continues to bloom,
it really pushes you into the path of bankruptcy.
And if you're thinking about bankruptcy,
you absolutely need to talk to a non-profit credit counselor
who's going to walk you through those options.
Another okay alternative is to get a loan
from a friend or family member,
we talked about this before as an option.
So instead of that friend or family member
gifting you that money, you would take a loan from them,
and then you would repay them back.
The only caveat to this one
is you could really tarnish a relationship,
if you don't end up paying that person back,
and like there goes the relationship.
So being clear about how much you can pay them,
and setting up those terms from the get-go
is really going to help you with this option.
The next option would be
to float your expenses on a credit card.
So this one can be really dangerous too,
because if you're floating money on a credit card,
knowing that you're gonna pay it back,
it could easily get you into that habit
of continuing to float things on a credit card,
letting that balance kind of build up over time,
and then you're really kind of stuck, back at square one
and making the situation worse.
So be careful about that, but that is an option.
Another thing with credit cards
is you can do a cash advance if you have credit,
and the cash advance is going to charge a lot less interest,
than a payday loan.
So that's why this option is better than a payday loan
because it's a lot less interest.
We're talking like 30, 36% compared to 100 plus percent.
So payday loans, I like to believe
they were initially built to help people, but unfortunately,
that's just not been the case for so many people
who walk into those payday loan centers
and walk out paying even more
than what they initially borrowed, like way more.
And so if you're in a very dire situation financially,
just know that there are more options
than just payday loans.
In fact, we have a ton of free resources
on thecollegeinvestor.com,
where you can get ideas to side hustle,
make extra money, cut expenses.
Let's really build a solid financial foundation
so that you can avoid these payday loans.
If you're interested in that, be sure to check out
all of our free resources at thecollegeinvestor.com.