The $40 billion a year payday loan industry is booming thanks to high unemployment and a lack of access to traditional bank credit. While most individuals typically think about payday lenders doing business mainly with poor people and minorities, the Wall Street Journal reports that payday loans are also increasingly being used by middle class and wealthy Americans who’ve fallen on hard economic times.
But it doesn’t matter whether you’re earning $20,000 a year or $200,000. If you’ve ever taken out a payday loan, you know they don’t come cheap. Annual interest rates of 400% or more are common, and that’s just one of the dangers of payday loans.
Fortunately, there are many better, less costly alternatives to payday loans. Here are 10 other sources of funds you can turn to when you need cash fast:
1. Obtain a Payroll Advance from Your Employer
Instead of heading to a local payday lender, march into your employer’s HR Department to inquire about whether a payroll advance is possible. Companies don’t typically publicize this option to employees. But ever since the Great Recession, a growing number of employers have began offering payroll cash advances and loans to workers, according to Alice Whinnery, CEO of LFE Institute, which provides information on financial literacy in the workplace.
2. Get Financial Help from a Local Non-Profit Organization
Regional non-profits and local community development groups are increasingly providing financial assistance for those in dire financial straits. So do a Google search for non-profit organizations in your town and contact a few to see about loans.
For example, in Arkansas, a group called Arkansans Against Abusive Payday Lending, provides borrowers with loans up to $500, which can be repaid over six to 16 months. The organization, comprised of 36 consumer, military and faith-based groups in the state, has been so effective that it helped drive payday lenders out of Arkansas altogether. As of August 2009, there are no payday lenders in Arkansas.
3. Use a Credit Card Cash Advance or Balance Transfer Check
A credit card cash advance typically involves a fee of 1% to 4% of the loan amount. Plus, the interest rates on credit card advances are now running anywhere from 15% to 25%. But that’s still far better than what you’ll pay if you resort to a payday loan. Besides, when used strategically, a credit card balance transfer may even help improve your credit score.
4. Get a “Small Dollar Loan” from a Bank
Even though the credit crunch has made it a lot tougher to get bank loans, many financial institutions are nevertheless launching new initiatives to compete with payday lenders. As of January 1, 2011, nine federally-insured banks began a new pilot program called FDIC Model Safe Accounts. One key feature of this program: “small dollar loans” of up to $2,500, approved in just 24 hours. Meanwhile, under the Bank On program, lenders nationwide are expanding their efforts to provide small, fast loans to borrowers in need.
5. Request a Loan from a Credit Union
In an effort to stem loan defaults and delinquencies, many large banks have reduced lending to individuals. Meantime, credit unions have been stepping in to fill the gap. Credit unions provide small, short-term loans to their members and you can join one based on any number of affiliation requirements, such as where you live or work. Find a credit union in your area via the National Credit Union Administration.
6. Seek cash from a Peer-to-Peer Lending Group
Just as credit unions have gained in popularity, so too have peer-to-peer lending groups, such as Lending Club or Prosper. But as businesses like VirginMoney have closed up shop, gone are the days when virtually anyone could get cash from a peer-to-peer lender. Now, the individuals who supply loans through these lending circles want you to have at least halfway decent credit to get a halfway decent interest rate.
7. Tap a Life Insurance Policy
If you have a life insurance policy – a whole life policy, not term life – it may have built up cash value over the years. You can tap into this money quickly and easily by taking a loan against your insurance policy (a first step) or cashing out of the policy altogether (a last-ditch move).
8. Return a Recent Purchase
Are you in a financial bind because you’ve overspent? If you did a little too much shopping during the holidays or for some other special occasion, that may be the cause (partially, at least) of your current economic woes. Rather than going to a payday lender, head straight back to the retail store or establishment where you recently made a purchase, return the merchandise you bought, and get a refund. Also, to avoid future overspending, read this advice for shopaholics.
9. Donate Blood Plasma – or Other Bodily Fluids
College students and others have done this for years when they’re in a financial pinch. It could be that the college crowd is more likely to hear about medical research projects or other health care-related offers in which they can get paid. But you don’t have to become a medical guinea pig to score a few bucks (unless you want to). Instead, just find a local hospital, clinic or health care facility that pays people who want to donate blood plasma, or other bodily fluids (translation: sperm). One such source for donating blood plasma is BloodBanker. Depending on the city in which you live, you can net up to $50 per donation.
10. Dip Into Your 401(k) plan
It pains me to offer this tip because I typically warn people not to raid their 401(k) retirement plans prematurely or unnecessarily. But if you’re at the point of seriously considering a payday loan, I’d reluctantly say: Go for a 401(k) loan, or even take a 401(k) withdrawal, instead. Even though the withdrawal will ultimately force you to pay a 10% penalty on the amount you take out, plus ordinary income taxes, I’d still recommend this route over getting a payday loan.
My rationale is simple: payday loans are like economic crack. You may feel a quick rush (or at least a sense of relief) from getting that fast cash. Perhaps you’ll even promise yourself (like many people who ‘experiment’) that that you’ll do it “just this one time.” But don’t kid yourself: payday loans are addictive and destructive.
Once you go down the path of getting a payday loan, it’s hard to turn back. That’s why the average person who gets a payday loan typically rolls them over, getting an average of one payday loan per month, or 12 in a year. And payday loan customers who use “roll overs” wind up paying over 1,000% in interest, according to a study by Georgetown University researchers. That’s a deal-breaker for me. Use the 401(k) money instead.