Updated on 02.15.07

10 Options To Consider Before Getting A Payday Loan

Trent Hamm

Yesterday, I discussed in brief my conflicted opinions on payday loans. To summarize, I basically think they border on predatory, but they exist because society provides no safety net to low-income people, and thus they do fill a marketplace niche.

The typical person who takes out a payday loan is an individual who has not built an emergency fund for themselves and is finding themselves with emergency (or pseudo-emergency) expenses that exceed their current funds. The prevalence of payday loan businesses make it easy for them to get such loans with little effort, and thus many, many people fall into that high-interest trap (that’s why so many of these businesses can survive and thrive). It’s truly an unfortunate situation, one that thrives on a lack of basic financial education.

Here are ten options for you to consider before you take out a payday loan. I know that most of the readers of this article aren’t in a financial situation where a payday loan is needed, but if you know someone who does, please print out this article and give it to them or else send them the link to this article.

1. Ask a family member for a loan in writing. If you are in desperate financial straits, ask a family member for a loan. However, you should encourage them to prepare the loan in writing and have the agreement notarized so that it is legally binding. Why? If you make the loan solely based on “trust” between you and the person you ask for the loan, you’re almost always going to damage the relationship you have, whether you directly see it or not, because you’re transferring your financial hardship to someone else temporarily.

2. Contact the companies that you owe money to. Ask to speak to a supervisor and attempt to negotiate a different payment plan, a reduced rate, or whatever you need to make the payments more manageable.

3. Take a cash advance on a credit card. Even the worst credit card has a far, far better interest rate than any payday loan outfit. If you can, take a cash advance on your credit card instead of seeking out a payday loan, as you’ll have to pay far less interest in the long run (approximately 25% APR versus approximately 350% APR).

4. Contact a local credit union. Credit unions are usually the best bet for obtaining small loans in emergency situations, even if your credit isn’t so good. Again, even if you have to get a relatively high rate loan from a credit union, it is nothing compared to the rate you’ll have to pay on a payday loan (approximately 10% APR versus approximately 350% APR).

5. Sell some items you don’t need. Look around your home and see what can be sold to net some emergency cash. Got a big pile of DVDs or CDs that you barely watch or listen to? Take them to a used media store. Have a Playstation 2 and a bunch of games in the closet? Take them all to the local GameStop. Even if you think you might use them again someday, you’re still way better off going this route than paying huge interest rates on borrowed money.

6. Find a temporary job. Get a part-time job wherever you can to earn some extra cash to help pay off your debts. While this won’t help immediately, it will help immensely over the long run to repay anything that you are forced into borrowing.

7. Look for social services that can save you money. The best place to start with this is to call your local social services center. Many people are eligible for programs that they’re not even aware of that can help with food, energy, and child care bills, which can reduce your financial burden and make it possible for you to dig out of debt. A friend of mine was once in a very, very scary financial situation and social services made it possible for her to turn things around.

8. Look for opportunities to eat and enjoy recreation without cost. Don’t be too proud to visit soup kitchens or church dinners if you’re in a financial disaster. You should also try to find free forms of entertainment to reduce your costs there as well.

9. Be open with those who are immediately affected. If your debt situation is going to impact your spouse, talk about it immediately. If it’s going to impact your children, make sure they know what’s going on. The less informed everyone is, the more painful and confusing and frightening it can be, especially for children. Even more important, the more informed everyone is, the more opportunities everyone has to use resourceful behavior to help solve the situation.

10. Don’t be afraid to ask for advice. You may be ashamed to talk about your financial problems with someone else – don’t be. Find someone you trust and tell them everything. Not only will this relieve a bit of your own psychic burden, but the person you talk to may have a ton of good ideas that can help you out.

Once you’re out of this situation, you should start an emergency fund. Open up a savings account at another bank and have them make automatic small withdrawals each week from your checking account. It’s small, so the financial impact won’t be great, and it’s automatic, so you don’t have to think about it, plus the money builds up quietly for you. That way, when things go wrong, you can go tap this account to fix the emergency.

One more thing: whenever you think of spending money for something unnecessary, think of how terrible it felt being in such a scary debt situation and ask yourself whether that money you’re about to spend might not be better off in your emergency fund or paying off a credit card debt.

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  1. Cris says:

    I can’t say enough how much I agree with you: payday loans are predatory. At one time in my life, I walked into a paday loan place with the intention of securing a loan, but balked after calculating the actual APR applied and actual amount of interest charged. I ended up eating popcorn for all my meals for 2 or 3 weeks (I worked at a movie theater at the time) and to this day I am thankful I never took out a payday loan and never applied for a credit card.

    I’ve met too many people that intended to secure a payday loan as an emergency, one-time event and ended up getting caught in a viscious cycle.

    I have learned something about debtors working through my own debt – they want your money. They don’t seem to care if it all comes at once (although they get pushy sometimes), they just care about getting as much as they can without pursuing expensive debt collection. Instead of being embarassed or ashamed when “Unknown Caller” appears on the CallerID, answer it and talk to them – more often than not, they accept what you can give them, and at least note in the account that you are answering the phone and willing to work with them on payment. Like you mentioned, more often than not, they’ll likely want to work with you on making it easier to pay by dropping interest rates, monthly minimum payments or otherwise relaxing payment terms. But if you don’t pick up the phone, they’ll never have the opportunity to work with you.

  2. Gooey Debt says:

    although I agree with some things about payday loan companies, I disagree in couching the argument in terms of low income wage earners. It really has nothing to do with our society not providing a safety net for low income wage earners. Our society has existed without payday loan companies.

    It is a consumption issue. There are plenty of reasons why people get into debt. I think if you look into who applies for payday loans, you will be amazed that they aren’t necessarily for emergencies. People simply do not budget and manage their money. There would be far less people, thus payday loan companies, if people managed money better.

    As I admited before, I got payday loans before and I wasn’t a low income earner. I was bad at managing my money and that is the reason I got a loan. I had over extended myself to the point I could not get a loan from any bank or creditor except payday loan center. My situation wasn’t an emergency in the beginning or leading up to my debt. It was only an emergency, because I had created it out of bad money management.

    Take away these kinds of “safety nets”, then maybe people will think twice about buying that 50″ plasma tv when they can’t afford it.

  3. jake says:

    Well for me the “low income” issue was right on in the sense that if you’re from places like southern California where there is a very large immigration community and to that effect a illegal immigrant population payday loans are very popular.

    In southern California especially around LA there are payday type shops everywhere, it almosts equals starbucks. The thing is that you see them mostly in low income or poor sections of the city.

    Payday loans attract because they accept almost anyone under any condition. When you’re in a whole, any life line would do. I don’t want to really use this but I cant think of anything better. Payday loans are sorta the easy way out when you’re in a big whole.

  4. Daisy says:

    There’s an interesting/eye-opening post over at Credit Slips that talks about payday lenders.

    It talks about how the lenders will hard sell their product even after the consumer has stated he may not be able to repay the loan.

    It also shows how payday lenders evade predatory lending laws.

  5. Susan Sabo says:

    Payday loans, financial education and monetary reality all go together in my book.

    Few schools teach financial basics. That hurts everyone and especially those who don’t get money management at home. After spending over 16,000 hours in school kids leave with almost NO sound financial skills. Balancing a checkbook; calculating interest; tracking money in vs money out; understanding loan vs lease vs paying cash. Basic. Did you learn these things in school? If you learned the general skills to do math you probably didn’t get them applied to the real world. (IMHO that’s because teachers never got that infor and the cycle continues) In math class an understanding of the high cost of payday interest would surely make a difference.

    Monetary reality. Too many people who need payday loans also think they need a cell phone, bling, or to eat a a fast food joint where one meal costs more than 3 meals made at home. A basic understanding of real need related to money and a way to evaluate the tradeoffs is what’s missing in America. Back to basic financial education – learning how to cook nutritional meals at every price level could also be well taught during those 16,000+ hours kids spend in school.

    People need to get real with their finances and get the tools to make it through to financial independance. The Simple Dollar certainly is a great place to get the tools.

  6. Citoahc says:

    The consumerist had an article not too long ago looking at the locations of payday loan centers and poverty levels.

    I believe some people get drawn into the payday loans under the impression that they will be paid off in a matter of weeks rather than the months to years with most loans and credit cards.

    If anyone was wondering here is the link.

  7. icup says:

    “Back to basic financial education – learning how to cook nutritional meals at every price level could also be well taught during those 16,000+ hours kids spend in school.”

    I think this is part of the problem, but a very small part. Its not that these things aren’t taught in public school, they are (or at least *were* when I graduated mid nineties). a bigger part of the problem, IMO, is that kids a.) don’t want to learn this stuff, and b.) its basically all theory to them anyway since most kids finances are handled by their parents, and therefore they learn it about as well as they learn other theory stuff, like American History (in other words, not very well).

    I had honors econ when I was a senior in 1994. Did I take advantage of it and really learn how to manage money? No, because I did not have a job and even if I did, I was more concerned at that point in my life with being a smart-ass than learning anything important.

    We also had mandatory home-economics in junior high (circa 1990).

  8. Gooey Debt says:

    we had basic budget classes when I was in elementary school. We learned all about checking and savings accounts. My economic education continued throughout my school years. Unfortunately, the joneses were more pervasive than my education. attaining that little extra of the american dream via 50″ plasma, nikes, bling, et. al. is the reason payday loan companies set up shop in demographically poor neighborhoods. but there are plenty of burb folk who meander into those neighborhoods, too.

  9. Angela says:

    Whether or not payday loans are ever acceptable, I thought this was a good post on how to avoid them. Thanks Trent.

  10. Hi there just wanted to gve you a quick heads uup and lett you know a few of the images aren’t loading properly.
    I’m not sure why but I think its a linking issue.
    I’ve tried it in two different internet browsers and both show the same results.

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