There are a few worrisome facts about payday loans, but the most important of them is that nearly 70% of the people who take them use the money to repay another loan or to pay for daily necessities, such as bills and food.
Even after the Financial Conduct Authority (FCA) took a stance against aggressive advertising and collection practices, by regulating short term loans companies in July 2014, there are still too many people who cannot get out of the debt circle once they have signed up for this type of loan.
A Few Basic Explanations
First of all, it is important to explain clearly why this type of borrowing is not a good solution for anyone. There are two main risks associated with payday loans:
- Huge annual percentage rate (APR) in the range of three-figure rates – ten times more expensive than the highest credit card rates;
- High rollover percentages for people who are unable to repay the entire amount on the due date.
Statistic data show that over 90% of the people who apply for short term pay day loans cannot repay them on the first deadline and have them rolled over at least twice.
Analyze Your Expenses
There are several alternatives to entering quick loans agreements, but the first thing you can do is eliminate unnecessary expenses and defer some of the ones that cannot be fully eliminated. You can do this in various ways:
- Prioritize your debts – Some money you owe, such as rent, cannot be postponed. Others can, and you can use the extra money to pay the more urgent debts, with high interest rates, to reduce the debt cycle.
- Find cheaper alternatives – Downgrade your landline, cell phone and satellite subscription to economy packages with less features.
- Think hard before you make a new purchase: do you really need that item right now? Could you wait and buy it at a later date?
- Leave your credit cards at home: impulse buying adds up to your debt. When you go out, leave your credit cards at home and avoid giving in to this spending habit that digs a huge hole into your finances.
Find Alternative Ways to Payday Loans
Sometimes, you really need that extra cash at the end of the month. In this case, just as in the situation of cutting debt presented above, there are better ways to get it than entering cash loan agreements with huge interest rates.
- Save money in an emergency fund: every cent you save from unnecessary spending should be saved into a special account, for emergency situations. Set a goal, like having $1,000 available in that account at all times, and, when you spend some money, put it back. This way, you will have that extra cash you need without resorting to payday loans.
- Adjust your tax withholding: usually, you receive a significant lump sum once a year, as tax refund. By adjusting your withholdings on your paycheck, you will receive a smaller lump sum, but larger amounts with each monthly paycheck.
- Use overdraft protection on your debit account: overdraft protection is a facility offered by your bank, allowing you to purchase goods with your debit card, even if you do not have the entire necessary amount available. You will pay an interest rate for the overdraft protection, but it is nowhere as high as that for instant payday loans.
Help Is Available – Seek It When You Need It
A lot of people get trapped into a cycle of debt because they are not financially savvy and do not have the knowledge necessary to make an informed choice. This is the case especially for people belonging to vulnerable social categories, and they represent the highest percentage of the storefront moneylenders’ clients.
However, these days, financial advice is available for free, through various websites set up by foundations and federal authorities. In emergency situations, these foundations offer personalized one-on-one counseling and a step-by-step action plan to help you get out of the cycle of debt.
The main issue to keep in mind at all times is that it takes one single bad decision to get you in a difficult financial situation, with rising debts. Before you walk into a payday loans store, consider every other alternative that you can use and do not hesitate to ask for financial advice.