Payday Loans Blog and Resources

What is a payday alternative loan, and how can it help me? If you are among the millions of Americans struggling with access to mainstream credit, this one's for you. If an unexpected expense were to come up within the next month, what would you do? Say that your heater broke or your car broke. How would you pay for it? For many of us, the answer is we wouldn't be able to pay, or we would need to get a short-term loan. People in both groups should know about this loan product: a payday alternative loan. Similar to its uglier step-sister, the payday loan, this is a short-term, small-dollar loan. However, where it differs is in the way that you access it, the way that it works, and how much it costs. What are payday alternative loans? To help unbox this topic, Xavier Epps, founder and CEO of XNE Financial Advising shares the basics: "Alternative payday loans are provided by federal credit unions and offer higher loan amounts with longer repayment schedules at lower rates." He adds, "Credit unions do not require borrowers to have good credit to qualify, and work with borrowers to improve their credit." Before there were PALs, there were just payday loans, also known as cash advances. These have been around for a long time. Check out this 1937 photo of the Liberty Finance Company, in Oklahoma City, Oklahoma: This isn't a new concept. Payday Loan Basics As a quick recap, Epps helps us sum up the basic ideas behind this type of loan: "Payday loans are high interest loans of generally smaller money amounts that are to be repaid in about the time of receiving your next paycheck or in about two to four weeks from the date the loan was made." He adds, "According to the Consumer Federation of America, payday loan APRs are usually 400 percent or more. Since lenders do not check credit, applying for a payday loan does not affect your credit score or appear on your credit report." Finance expert Gordon Polovin serves on the advisory board for Wealthy Living Today. He explains, "A payday loan is, in most cases, a "desperation loan" for those working individuals in need of urgent cash and nowhere else to turn. As it implies, the payday loan runs from one paycheck to next (i.e., weekly, or monthly)." "Generally," he adds, "payday loans are for a few hundred dollars only. Rollovers are common, coming into play when the borrower is unable to close the loan out at the agreed time. Depending on the state, and depending on the deviations from the original contract (e.g., rollovers) the interest rates and additional fees are in loan shark territory. If you extrapolate them on an annual basis, it can go as high as 400 percent annually. To reiterate, the only good thing about getting into a payday loan channel is that it's likely for less than $1,000. The bad news is that a great many borrowers, once in, can't get out and go from paycheck to paycheck just settling the costs but not denting the principal amount." For years, payday loans were the only alternative for people who didn't qualify for a loan that requires a credit check. This type of retail consumer-facing loans are similar to auto title loans, which are a few steps above a pawn shop. Payday Alternative Loan (PAL) Basics In 2010, the National Credit Union Administration (NCUA) began offering PALs, with principal loan amounts from $200 to $1,000 and loan term lengths from one month to six months. A PAL is different from a payday loan, in intention and in practice. "In short," advises Polovin, "these are payday loans, but with a good measure of discipline so that it doesn't become a bottomless and dark borrowing pit." However, the big difference, he says "is fundamental to the intentions of the lender. A payday loan lender milks borrowers for all they are worth if push comes to shove, within the limits of state laws. Conversely, Credit unions are non-profit, cooperative organizations, designed to serve the interests of its members.Not everyone qualifies as a member, but if you do, and if the credit union offers PALs it's a far improved alternative to the payday loan route.The starting intention of the PAL lender is to help your cause (albeit still in the desperation arena) and not take advantage of your financial weakness." Benefits of a PAL It's nice to have someone in your corner when an unexpected problem comes up.  Logan Allec, a CPA and owner of personal finance site Money Done Right helps explain: "Payday loans are notorious for being extremely expensive due to abnormally large interest rates and punishing terms that can trap someone in debt." Consumers who are able to get a PAL instead of a payday loan will benefit from lower cost to borrow and fewer debt traps. Lower cost to borrow "A payday alternative loan from a credit union will likely have better interest rates and terms," advises Zina Kumok, a personal finance expert for DollarSprout.com. "Plus, they're less likely to be predatory and more able to work with you." "In almost every case," she adds, "a payday alternative loan is better than a payday loan. A payday loan has incredibly high-interest rates, often exceeding 300 percent APR. That means you could wind up paying more in interest than you originally borrowed." "If you are looking for a lower interest rate," agrees Allec, "then a payday alternative loan will be a much more affordable rate to get." How so? "Local federal credit unions have a rule that they cannot charge more than 28 percent interest, while a payday lender has no such rule," explains Allec. Fewer debt traps "PALs don't allow you to dive too deep, limiting the PAL amount to $200 on the bottom-end and $1,000 on the top," says Polovin. "There's a cap on interest rates annualized at 28 percent, with a $20 processing fee." How does this help? "Many people who take out payday loans end up renewing them several times before paying them off," says Kumok. "This means the interest will capitalize several times before the borrower can pay it back." The payday loan rollover is problematic for many borrowers. This can turn into a cycle that is hard to come back from. On the other hand, the aim of PALs is to be a healthier borrowing option for those with credit issues. Hence, explains Polovin, "Rollovers are forbidden, and the borrower must settle the PAL within half a year with an installment plan in place. No borrower can obtain more than one PAL in any six months." Challenges Although these official payday alternative loans offer many easy-to-see benefits, the following factors make PALs a little harder to adopt for consumers: Payday loans are easier to access Payday loans are less restrictive Federal regulations limit PAL amounts to $1,000 Payday loans are easier to access Another way that PALs differ from payday loans is in the ease of access. "While payday loans are more expensive, their benefit is that they are relatively easy to get and less restrictive," says Allec. "Most towns will have a few storefronts that offer payday loans with relatively few questions asked." Epps adds, "In 2015, there were more payday lender stores in 36 states than McDonald's locations in all 50 states, according to the Consumer Financial Protection Bureau." Additionally, not all credit unions offer PALs. So, just because you are a member of a credit union, doesn't mean that this will be an option for you. "In 2017, only one in seven of the country's 3,499 federal credit unions offered alternative payday loans," says Epps. On top of that, he says, " For those that do, you must be a member of the credit union for at least one month," before you can be eligible to get a PAL. So, people who are caught by unexpected expenses won't be able to get one for at least a month if they aren't already a member. Payday loans are less restrictive Not only are traditional payday loans easier to access, but they "are also less restrictive," says Allec. "For example, there is a limit to the number of payday alternative loans you can get in a six-month period but no such limitations for payday loans." PALs have lots of rules and stipulations. Federal regulations limit PAL amounts to $1,000 The upper limit of a PAL is $1,000. What if you need more than $1,000? "If you need more money, then a payday loan could be what you are looking for," says Allec. "While some payday lenders may have limits to how much you can borrow, a payday loan does not have a federal restriction on how much you can borrow." That will be up to the payday lender itself. "Therefore," Allec sums up, "the decision on what type of loan might be right for you could be made for you, depending on how much you need." Action steps: How to get a PAL? If you are someone who is living paycheck to paycheck, the stress is real. Wouldn't it be nice if you had a friendlier fallback plan than a local storefront lender? With the one-month membership restriction, you need to think about joining a credit union now, rather than waiting until an unexpected bill or expense catches you off guard. Here's what to do: If you are already a member of a federal credit union, ask if they offer PALs. Polovin warns: "Understand that not all credit unions offer PALs, so that's an essential item to check out." If you aren't a member of a credit union already, check out your local options. Zumock suggests, "If you already have one near you or associated with your neighborhood or employer, that might be your best bet." Find federal credit unions near you via the government's Credit Union Locator. Do this now. If you wait until you actually have an emergency to cover, you won't have been a member long enough to take out a PAL.

"It is important to know that millions of Americans rely on payday loans each year to handle emergencies." says Carey Zielke, personal finance expert for Realities and Dreams. Payday loans are often referred to as predatory, but they still stick around in America. Consider this: According to a Federal Reserve report released in May 2019, four in ten adults would have difficulty covering an unexpected $400 expense. Twelve percent of adults would be unable to pay the expense by any means, and 2 percent would use a payday loan, deposit advance, or overdraft their accounts to cover the expense. A term common in the short-term lending industry is a payment rollover, or a loan rollover. This is when a borrower can't make the payment in full and takes an option to roll the loan payment over, for more time to pay it off. To consumers who rely on short term lending, a rollover can be helpful, but also harmful. Let's explore how and why. How does a loan rollover work? "First, we need to clear up the term rollover," says Zielke. "A payday loan rollover can mean two different things: Consolidate the loan into an installment loan. Pay the outstanding interest and extend the due date." In addition to these two instances, there is a third that is common in the payday lending industry. Jacob Dayan, CEO and co-founder of Community Tax and Finance Pal explains, "Another way to roll over a loan is if the borrower takes out a new loan in order to cover the previous loan." "The second option, and most common," says Zielke, "is accompanied by a fee, usually an interest rate increase." To better understand what this means, Zielke shares an example: "Basically, if you have a $300 payday loan with a 15 percent interest rate on a 14-day term, you can pay $45 to extend the due date another 14 days. The fee for this will be an interest rate increase, most likely another 15 percent. The loan interest rate is now 30 percent. If you still can’t afford to pay it off, you can roll it over again by paying the $90 of interest, for 14 more days. Now your interest rate will be 45 percent." With a rollover, the cost of a short-term loan can clearly add up. Essentially, you are paying more money so that you can delay your payment, says Xavier Epps, founder and CEO of XNE Financial Advising. He adds, "You will still owe the same principal and fees associated with the loan. If you are seeking to rollover your loan, expect to end up paying more than what you would have paid, had you originally finished paying the loan off on-time." Are loan rollovers regulated? Robert L. Föehl, Esq., Executive-in-Residence for Business Law and Ethics at Ohio University explains, "The federal Consumer Financial Protection Bureau and states have been particularly concerned about payday lending activities, including rollovers. A number of states require a ‘cooling off’ period after a payday loan comes due. This is a period that must elapse before a borrower can roll over the payday loan. The CFPB has issued a rule related to various aspects of payday lending as well." When is a loan rollover helpful? To help us understand how and when this loan option can be a positive thing for consumers, Professor Foehl, shares some details: "The helpful aspect of payday loan rollovers is that they enable borrowers to extend the repayment period of their loan. This is particularly helpful when the anticipated source of funds for repayment doesn’t materialize for the borrower." "For example," he says, "a borrower may take out a payday loan for emergency car repairs, believing that the short-term loan can be paid in full from the borrowers upcoming paycheck(s). However, the borrower may not be able to work the regular number of hours he usually works because of the lack of reliable transportation. As such, the actual paycheck is less than what was initially anticipated." Föehl adds, "It is important to remember that payday loans are designed primarily for individuals who are living paycheck-to-paycheck and qualify for few, if any, other types of credit products. Payday loans exist to serve these individuals, who are underserved by traditional lenders." These are people with bad credit or no credit score, also known as credit invisible or credit unscorable consumers. When is a loan rollover harmful? Just as a loan rollover can be helpful to the consumer who is having trouble making a loan payment in full, there are also times when it can really harm a borrower's finances. Professor Foehl explains, "The concern with payday loan rollovers is that they are usually accompanied by additional fees (after all, the payday lender needs to be compensated for the additional risk of loan default). These fees are usually rolled over into the new loan. In the circumstance where the borrower hasn’t made any payment toward the loan, the loan amount actually increases." Now imagine how hard it would be to make the payment, if your loan keeps growing, but your earnings stay the same. "Multiple rollovers exacerbate the problem," he warns. "A borrower can get into a cycle of rolling the loan over and over, increasing the loan amount due to the additional fees, until the borrower is unable to pay back the total amount lent." What is a cycle of debt? "A loan rollover is harmful because it can lead to a cycle of debt," explains Dayan. "If the borrower is unable to pay off their debt, they are continuously trying to extend their loan due date or take a new loan in order to pay the first loan off. By choosing to rollover their loan, the amount they're borrowing increases and it will become difficult saving enough money to pay off the entire loan." Sara Nelson-Pallmeyer is Executive Director of Exodus Lending, a non-profit that helps consumers refinance these expensive loans. As a non-profit, Exodus charges no interest or fees. She explains a bit more about how one rollover can easily put someone into a cycle of debt: "Loan rollovers are the result of people not being able to repay their payday loan, including hefty fees, which are due in full on one's next payday. Borrowers end up taking out a second loan to repay the first, a third to repay the second, a fourth to repay the third, and so forth. Each of these new loans (after the first) is a rollover." "Typically," she adds, "people end up spending more in interest and fees for their loans than the amount that they borrowed in the first place." What can borrowers do to stay safe? As we mentioned before, payday loans exist because people without any access to mainstream credit need them. We asked our financial experts for advice on handling or managing payday loan rollovers and personal finances. Here's what they said: Nathan Wade, Managing Editor for WealthFit Money"The biggest reason why you shouldn't take part in a loan rollover is that you will have to pay more long-term. Although it may seem beneficial in the moment since you will have more time to pay it off, you're having to pay more. " "Don't borrow with credit cards. If you can't pay your credit cards in full every month then you probably shouldn't be using one. Utilize cash or a debit card until you're comfortable with your spending. Create a spending plan that lays down how much you can spend and how much you're actually spending. Start by budgeting living needs such as food and housing, then start to include expenses that you need and not just 'want.' This means you might have to change your spending habits, like canceling cable services. You should also pay attention to how many times you eat out or attend expensive events. Making these small changes can make a huge difference in your budget and help you escape the cycle of debt." Xavier Epps, founder and CEO of XNE Financial Advising"Make sure that you do not frequently roll over your loans your total balance can quickly increase by hundreds." Carey Zielke, Personal Finance Expert, Realities and Dreams"My number one recommendation for everyone is to save some money, three to six months of living expenses as an emergency fund. I understand that will take a substantial amount of time to accomplish, and sometimes is not even possible depending on our financial situations. To start this process, at an absolute minimum, save up $1,000, and use it ONLY for emergencies!"

The Federal Report on the Economic Well-Being of U.S. Households in 2018 found that 4 out of 10 adults would have trouble paying an unexpected $400 expense, like a car repair. This would lead them to borrow from friends of family, put it on a credit card, sell something, get a bank line of credit, get a payday loan, or, as 12 percent of respondents said, they “would not be able to pay for the expense right now” by any means. While this figure is up from 5 in 10 adults in 2013, it still shows that a large percentage of Americans are left to grasp at straws when they need unexpected cash. Half of American adults either don’t have a credit score or have subprime credit. That stinks, but it stinks even more when you have an unexpected bill to pay. In this article, we are going to talk about red flags to avoid when vetting payday lenders in an emergency. First, how bad is a bad credit score? “Having a credit score at or below 500 makes qualifying for loans incredibly difficult,” says Jared Weitz, CEO and Founder of United Capital Source Inc. “It is at this score range where payday loans become the only option.” For people who don’t have access to mainstream credit, or a family member with the means to lend them $400, payday loans are often the only viable option in an emergency situation. To help our readers choose a safe and trustworthy payday lender or payday alternative, we asked personal finance experts for advice. Here are the red flags they want you to look out for: 1. Online only lenders “They’re only available online. Most payday lenders will have brick-and-mortar stores. There are very few online-only payday lenders that are legitimate businesses.“ — Patricia Russel, CFP, FinanceMarvel (now known as Credit Repair Expert) 2. Loan amounts “They offer you a loan for your full paycheck. You want to avoid this because then if anything comes up at all, like you need to buy food or put more gas in your car, then you won’t be able to repay the loan in full. Because of high interest rates on payday loans, you can end up struggling for years to pay back this loan that continues to grow.” — Russel 3. Upfront payment “A major red flag for working with a bad or scamming lender is if you are requested to pay an upfront fee in order to process your loan. If you receive a payday loan collection call, this is a concern with either a lender you are working with in the past or one you are looking into. The caller may begin to request collection for a payday loan you have and might even be able to share personal information with you as verification. Pay attention to this and be sure to vet out a potential lender by checking websites and customer reviews for feedback.” — Weitz 4. Not stating the APR “Because payday loans are so short term, they typically offer you a ‘fee’ without stating the APR. It makes the number sound more reasonable. When you don’t know the percentage, you don’t realize that it’s several hundred percent. This will matter a lot if something happens and you can’t repay the loan in full on time. That percentage will make the amount grow and grow until you’re in a hole you can’t climb out of. Avoid any interest rate in the triple digits.” — Russel 5. Last minute fees “It is normal to be charged a higher interest rate because you have a bad credit score. It’s not normal to be charged ‘fees’ for a poor credit score. Some lenders will even add these fees on at the last minute, claiming they were mistaken, and you didn’t qualify for the product you came in to sign a contract for. Don’t fall for this.” — Russel 6. Misleading information “If they lie to you about anything, or ask you to lie about anything, run away. It doesn’t matter how small it seems, find another lender. They could ask you to lie about how much money you make on your application, or they could keep brushing away mention of fees without giving you direct answers. Don’t play these games, it means something predatory is going on.” — Russel Special thanks to Patricia Russel from FinanceMarvel (Credit Repair Expert) and Jared Weitz from United Capital Source for their financial advice.