Maybe you’re coming up short this month or you’ve had an unexpected expense. Whatever the reason, you need to explore your options to get by until your next paycheck.
What kind of loan should you get? You have many credit options, including payday loans, personal loans, and credit cards, but some are better than others. With some better decision-making, you can avoid some high cost loans and see how to save money when you need access to credit.
Payday Loans and Title Loans
Payday loan companies are notorious for high interest rates. One of the lowest APRs available is 29 percent. Some of the highest APRs range between 155 percent and 1,105 percent. These interest rates often trap borrowers in debt that compounds at excessively high rates.
Next to payday loans are title loans. These loans give you a loan in exchange for your car’s title. It’s essentially pawning your car.
Both payday loans and title loans should be avoided at all cost. Fortunately, there are better alternatives.
The advantage of these loans is that people with low credit scores can qualify easily, whereas with the other options, it can be more difficult.
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If possible, you can borrow from a friend or family member. It is especially important with these loans to pay them back. Not paying them back can put a strain on your relationship.
Alternatively, there are companies that specialize in personal loans. These loans do not require collateral.
The interest rates for personal loans are much lower than the interest rates for payday loans. On the low end, the APR sticks pretty close to 6 percent, though some companies may offer slightly lower rates. On the high end, the APR ranges between 15 percent and 36 percent.
Personal loans also come with a monthly repayment plan.
The lower APRs on personal loans is a huge plus. The only downside is that some credit scores can be too low to qualify. One of the lowest qualifying scores is 500. However, most score requirements are in the 600s and 700s.
Credit cards can be an excellent tool for building credit and protecting your money. Credit cards can also turn into credit destroyers. It’s easy to carry balances and growing debt on credit cards. Credit card interest rates are often higher than most bank loans.
Credit card APRs vary based on the card you applied for and the rate you qualify for. The highest interest rates on credit cards tend to stay below 30 percent. This is lower than the higher APRs for personal loans.
Credit cards are also convenient, especially if you already have one. You can use it for groceries or paying for an unexpected expense.
The danger is forgetting to make regular payments that are higher than the minimum payment to repay the “loans” you took out. If you’re disciplined with your credit card payments, they can be a convenient and useful tool even when you carry a balance.
While personal loans and credit cards can help in a pinch, if you use them to help in too many pinches and aren’t making payments, you may find yourself overwhelmed with debt and your credit score dropping.
If this is the case, there are debt relief options, like credit counseling, debt consolidation, and debt settlement.
Credit counseling companies help people evaluate their spending and develop better financial habits.
The benefit of using a credit counseling service is the support in creating new financial habits and having someone help you stay accountable for paying off your debt. It also doesn’t hurt your credit score. Alternatively, you can also look to services like Experian’s Credit Boost to improve your credit score through the inclusion of non-traditional payment histories (e.g., utilities, cell phone bills, rent, etc.).
Debt consolidation involves taking out a new loan to pay off current loans. This process makes all of the payments into one payment and the new loan ideally has a lower interest rate.
Debt consolidation companies generally manage their clients debt rather than offering a new loan. Debt consolidation companies will also negotiate lower interest rates on client debt. Clients pay one monthly payment to the debt consolidation company, and the company disburses the money to each of the lenders.
Debt consolidation companies offer a free consultation. If someone decided to become a client, there is usually a set-up fee and a monthly fee for services included in the monthly payment. Specific details concerning cost can be discussed during the consultation.
Debt consolidation is advantageous for many of the same reasons that credit counseling is.
Debt settlement is ideal for individuals in extreme debt circumstances. Individuals stop making payments on their debts and put money aside to make a settlement payment later. Because you stop making payments, your credit score drops. However, there are ways to improve your credit score once your debt is settled.
In the meantime, debt settlement companies negotiate the total debt down. Fees for these services are only applied after a successful settlement is reached. Debt settlement companies charge a certain percentage of debt, typically 15 percent to 25 percent of the total enrolled debt.
Budgeting and Saving
Evaluate and track your spending to determine what expenses you can reduce or cut altogether. This will help you find more money to put into your savings.
Set a budget at the beginning of each month and hold yourself accountable for your spending. Always plan to set aside savings before paying for your expenses. This will help you prioritize saving and consistently build your emergency fund, new car fund, etc.
Having savings can help you avoid being in a pinch, overusing your credit card, and applying for loans.
Alice Stevens is a language enthusiast, loves history, and enjoys traveling. She manages content for BestCompany.com specializing in finance, insurance, and car warranty.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.
Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions, tax reform in 2018, or other useful tax topics. I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.