Evan Sachs
Your car breaks down. You get sick and can’t make it to work for a few days. You have a big bill coming up that you weren’t able to save for. Any of that sound familiar?
We all face emergencies and unexpected expenses. If you don’t have an emergency fund when these costs pop up, you can easily feel pressured into desperate measures. One of the worst things you can do when you need cash fast is to take out a payday loan.
Why Payday Loans Are Bad
For years, I watched family members get payday loans to cover holiday expenses or pay bills, and it almost always ended badly. While they felt temporary relief by using the funds to cover their expenses, they often lost out on a ton of money when it came time to pay back the loan.
Interest rates for payday loans are ridiculously high with APRs around 400 percent, according to the Consumer Financial Protection Bureau.
“Payday loans tend to be reserved for people with bad credit, so lenders can often get away with charging such high interest rates,” says Lisa Brewer, a consumer credit expert.
“What’s dangerous about getting a payday loan is that it often forces you into a dangerous cycle of getting into more debt and using additional loans to ‘bail yourself out’ in a sense,” she adds.
You do “more harm than good because you spend way more money than you would have originally spent, thanks to inflated interest rates.”
So if payday loans could potentially cost you hundreds to thousands of extra dollars, what can you do instead when unexpected expenses pop up?
Ways to Avoid Payday Loans
1. Build Your Emergency Fund
First, you want to save at least three to six months’ worth of expenses in an emergency fund. Prioritize building an emergency fund by paying yourself first whenever you receive some income.
Store the money in a high-yield savings account through a bank like CIT and connect your checking account so it’s easy to make transfers when you need extra money quickly.
If you don’t have an emergency fund or enough savings, and you need to get cash quickly to cover an expense, consider the following alternatives before getting a payday loan.
2. Delay the Purchase
This doesn’t always work, but sometimes you can delay a purchase until you receive your next paycheck.
If you have an overdue bill or debt payment, ask your creditor for an extension. If your car needs repairs, you may be able to carpool to work for a week or take public transportation until you can round up the money.
3. Make Some Extra Money
If you’re dealing with an emergency that can’t be put off, try making some extra money fast through a side hustle.
Maybe you can sell some of your old stuff online, do some maintenance work in your neighborhood, babysit, or walk dogs.
4. Borrow Some Money
You might not like this option, but you could ask a friend or family member for a loan.
I wouldn’t get into the habit of constantly borrowing money from people. And whether or not you should ask also depends on how much you need. If you just need $200 to get you through the next four days until you get paid, that might be more doable than if you needed to borrow $2,000 to cover you for a month.
5. Consider a Low-Interest Credit Card
As a last resort, you might want to use a zero-percent APR or low-interest credit card. Using a credit card to cover emergency expense isn't ideal because you want to keep your balances low and pay off the bill in full to maintain a good score.
Credit cards tend to have relatively high-interest rates, but those rates are usually still lower than payday loans.
Plus, some come with a zero-percent rate for a few months as an introductory promotion. Then the rate increases to anywhere from 12 to 30 percent.
Still, this is much better than dealing with a rate of 400 to 500 percent.
If you do decide to use a credit card, make sure you develop a plan for paying off the purchase in a timely manner.
Ultimately, Be Prepared
The key to avoiding a payday loan is to be as prepared as possible. Start saving up for emergencies. Maybe even set aside a cash buffer in your checking account in case your expenses go over one month.
Also, improve your credit score by paying off debt and using cards wisely so you never have to consider getting this type of loan.
