Payday lending is one of the most usurious ways to borrow money imaginable. The industry is scandalous to the point that many states have regulated it so heavily that lenders have actually exited certain markets. The biggest issue with payday lending is that many borrowers must use their services at least 26 times before their debt is paid and they are back on stable financial footing. What can be done to help the borrowers stuck in this vicious cycle of having to re-borrowing? Education and alternatives.
I went back and forth…education before alternatives, or the other way around. It is sort of an egg before the chicken debate. Eventually, I decided that, for people who are in the re-borrowing cycle, the first step should be to get out of that cycle. As you know, you can’t just refuse to repay the loan you have now. Well you can, but that is a whole other struggle involving the courts and bounced checks. Barring that route, there are three viable alternatives to the local payday lender; all involve peer-to-peer lending sites. The top P2P sites are Prosper, Lending Club, and Activehours. Here are a few highlights of each:
- No prepayment penalties.
- No rate hike or payment increases.
- No fee for borrower listing, but there is a closing fee that varies between 1 and 5 percent.
- Service available in 45 states
- Loans up to $35,000
- Short application and quick funding.
- Fixed monthly payments.
- On average, borrowers find rates that are 32 percent lower than when using a payday lender.
Activehours is a fairly new service that acts much like a payday lender with several borrower-friendly tweaks. Using the Activehours app, you have access to short term loans, but there is no set interest rate. Instead, Activehours requests a ”tip” in the amount of a borrower’s choice. Some highlights are:
- Available to hourly workers only.
- Must have direct deposit and online or computerized time sheets.
- Uber and Lyft drivers qualify.
- Using your online timesheet, advances are based on unpaid hours worked.
- Initial loans are low, but grow with repeated use.
- Funds are direct deposited and payments are automatically withdrawn from the same account.
It may seem weird to recommend a payday lender to replace a payday lender. The key is the tip. Most tips are significantly lower than the interest charged by traditional payday lenders, giving you the opportunity to get out of the cycle of re-borrowing.
You can read 100 personal finance blogs and each one will tell you the only way to escape payday lenders is to ”stop living above your means.” How many times have you thought: ”Great, now that you have said that, I will.” A better alternative would be to give you a couple of tools that may help you eventually stop spending more than you make.
You have already taken the first step by recognizing that you need to make some changes to your spending habits in order to survive financially. That would have been the first tool provided here: being self-aware of your bad habits.
The second tool is to build a budget. Walking you through the entire budget building process is a long article in its own right, so here is a link to a previous article we posted on the topic. You will want to keep in mind that the process is going to take time. Many find it frustrating in the beginning; but remember, you are training yourself to undo years of ingrained poor financial habits. Replacing them with the positive habits involved with a budget will take time. The struggle within yourself will be well worth the effort if you give enough time.
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