Everyone that was in trouble probably knows what payday loans are.
If you don’t know what they are, consider yourself happy!
Payday loans are small and short-term loans intended to cover another loan. They can be appealing in a crisis, but on the other hand, the consequences of taking a payday loan can be severe.
Usual fees for every $100 borrowed are often between $10 and $30. That means that for $1000 payday loan fee can be as high as $300.
Since this isn’t convenient for anyone, federal credit unions offer payday alternative loans with a lower cost than traditional loans and ensure more time for borrowers to pay back.
It’s essential to know every aspect of this loan, and therefore today, we will talk about:
- What is an alternative payday loan, and how to apply for it?
- Why would it be better to stay away from this loan?
- What are other alternatives to get cash?
- What is the best way to make money?
- The best alternative – the Infinite Banking Concept.
Let’s dive in!
What Is a Payday Alternative Loan?
National Credit Union Administration has been regulating payday alternative loans (PAL) since 2010 when they created the program.
There are strict rules about the loans, and they have to be:
- Granted for loan amounts between $200 and $1,000.
- With a maximum annual percentage rate of 28% (application fee of no more than $20).
- Issued to borrowers who have credit union accounts for at least one month.
- Fully paid off after a loan term of one to six months.
- Supported one at a time to borrowers. For six months, the same borrower cannot receive more than three PALs.
The NCUA, in 2019, added a second PAL option named PAL II loans. The second option has similar regulations but with these exceptions:
- The maximum amount of loans is $2,000.
- The due date for payments is one to twelve months.
- The one-month waiting period has been canceled; borrowers just have to be credit union members.
Borrowers are allowed to have only one type of PAL at a time.
Some credit unions even provide free financial counseling services to each member.
According to studies, four out of five payday borrowers have to prolong their loan because the lump sum is due quickly. The lender charges more fees after every loan is rolled over or a new one is taken out. It is known as renewal or rollover fee, and it is a cycle of debt that is hard to break.
How To Apply For Payday Alternative Loan?
Usually, federal credit unions that provide payday alternative loans don’t require users to have good credit. The borrowers’ income and ability to repay are crucial aspects for them. Often they ask for some proof of the income when people submit applications.
When it comes to credit unions, not all credit unions offer PALs. If you’re interested in your local credit union, the best would be to find it on their website or call them to check. The same is with eligibility requirements when someone isn’t a credit union member.
This is significantly different from traditional payday loans offered by for-profit online or storefront lenders (usually considered predatory lending).
Credit unions extend membership based on the place where someone lives, hist religious organization, employer, military service, or other causes.
Most credit unions charge one-time membership fees, which depend from credit union to credit union.
We think there is no need to talk much about how tricky it can be if someone qualifies and gets a payday loan and doesn’t have money to repay it. Especially with that high fees, many people end up in more debt.
Is It Worth Taking a Payday Loans?
It is not! Whether it is a traditional payday loan or an alternative payday loan, it isn’t the best option for you or anyone, except payday lenders who make money when borrowers can’t repay the loans.
Even though payday alternative loans have better conditions for borrowers with lesser interest rates and lower fees, it is still not good. They just fixed from worse to worst.
Maybe it would be wiser to pay a certified credit counselor to help you make a payment plan for your loans based on personal finance than to pay interest and fees on a payday alternative loan.
The usual fee for a payday loan is $10 to $30 per every $100 borrowed, while the deadline for payment is often two to four weeks.
For example, if a payday lenders charge $15 for a $100 two-week loan, that would be 391% APR.
Why It’s Important to Avoid Payday Loans?
From everything above, it is clear that payday loans are one of the most expensive ways to borrow money. Fortunately, payday loans aren’t the only option.
Yes, a payday alternative loan is a slightly better option than a regular payday loan, but keep in mind that it still carries pretty high-interest rates. Interest rates are capped by low, but still, they are 28%.
Even if you end up in an emergency financial situation, there are plenty of other ways to get out. In some cases, seeking help from nonprofit credit counseling might be beneficial.
What Are Other Options to Get Cash?
Let’s find out what other options we have, even those with poor credit!
“Bad Credit” Personal Loan
Unlike loans from banks or online lenders, credit union personal loans are easier to apply to and generally have a lower cost.
A person can qualify for bad credit if his credit scores fall in the fair credit score range (580 to 669). Minimum credit scores are 580. Below that, lenders won’t approve applications.
For people with a score less than 580, there is an option to use a co-borrower or co-signer if the lender allows it.
Except for credit score, lenders will base persons’ eligibility on other factors, such as their income and debt-to-income (DTI) ratio.
With this type of personal loan, you wouldn’t secure the best interest rate with a fair credit score, but usually, lenders have a maximum interest rate in the mid-30s.
Rates on personal loans are still high, but it’s a far better option than a payday loan.
The average amount which lenders offer is between $500 and $10,000.
Keep in mind that the average APR can be pretty high.
Compared to home and auto loans, ”bad credit” personal loans don’t require putting up property as collateral, but they usually require a credit check.
Borrow Money From Family or Friends
No one is ever pleased with a situation of financial instability, but life happens!
Even though we can try to make perfect plans for the future and secure it, some events aren’t even predictable.
So, don’t be ashamed to ask your family member or closest friend to borrow money. In that way, you would successfully avoid the high-interest rates and fees of payday loans. Plus, it is easier because there is no formal application process.
Don’t forget that you should still make a lending agreement where you will cover repayment terms and the interest rate (if any).
Side note: Don’t be careless because this is a more relaxed way to borrow than a federal credit union. You still need to make on-time payments. Don’t forget it: Short reckonings make long friends.
Low-Interest Credit Card
There is an option for people to get low-interest credit cards, although the individuals’ credit may be a bit shaky at that moment.
If they don’t get it, there is at least a card with an APR that’s significantly lower than the one for a payday loan.
Anyone can use Experian CreditMatch to check if they are a potential qualify for a low-interest card.
There is also a balance transfer card to help people if they have a hard time paying back credit card debt.
Usually is required to have good credit or better to qualify for a credit card with low-interest rates.
Lending Circles
The basic idea of lending circles is that people contribute a shared pool of capital that can lend to each other without interest and without racking up revolving debt.
Having a membership in a lending circle allows you to borrow cash from other people at no cost. That money can be used to pay off high-interest loans, cover emergency expenses, fix a car, etc.
A lending circle contains six to twelve people, and the amount for a loan can go up to thousands of dollars.
One of the most popular lending circles is operated by Mission Asset Fund.
Peer-to-Peer Loan
Peer-to-peer lending services are online alternatives to traditional credit card issuers (like banks and federal credit unions). It’s also can be one of the payday loan alternatives because it’s more affordable.
Popular online platforms for this type of short-term loan are LendingClub and Prosper.
For reference, APRs at Prospere is between 7.95% to 35.99%. With LendingClub, it is between 6.34% and 35.89%.
Make sure to understand that peer-to-peer loans typically have fees based on the percentage of the borrowed amount.
Credit Card Cash Advance
A credit card cash advance also can be an option besides the payday alternative loan because it has a lower interest rate. One of the short-term loans allows you to borrow a set amount of cash as an advance that you will repay with interest.
Start a Side Hustle
If you have a little extra time with these creative ideas, it will be easy to make some money aside from your job!
Even if you don’t need extra money right now, it would be wise to turn some time into cash through a side gig to have on hand in the future.
Which Option Is Best For You?
These options are better than a payday alternative loan and certainly better than regular payday loans, but they are not good enough.
What if we tell you that it is possible to borrow cash from yourself and even make more money that way?
In addition to that, there is an option, unlike these above, that doesn’t require high-interest rates and unreal fee amounts.
We won’t settle for anything less than the best option!
The Best Way to Get Cash
Besides the protection for the family after the policyholder’s death, a Whole life insurance policy has a cash value component that grows over time. Not only that, but you can access and enjoy that cash value while you’re alive!
The best part is that with your Whole life you have zero risk. The premium does not change, and the death benefit and cash value amount are guaranteed.
You can use your whole life insurance as an investment due to two products rolled into it: a permanent life insurance policy with lifelong coverage and a savings account.
After paying your premium, the insurer invests some amount in giving your policy a cash value.
Since the rate is fixed, the account grows undisturbedly. Additionally, the cash value portion is growing tax-deferred. This means that your earning interest isn’t taxed while it’s in the account.
Once you’ve accumulated enough cash value, you can start taking out loans against your policy!
It’s essential to choose an insurance company wisely. If you choose a mutual life insurance company (owned by its policyholders), you will receive dividends!
Become Your Own Bank by Using the Infinite Banking Concept
Infinite Banking Concept, or over-funded life insurance, is a strategy that supports you to become your own bank.
You have the freedom to access your money at any time. And on top of that, by taking loans against the accumulated cash values of your policy, you will maximize the work of your money.
After taking out a loan, your cash value grows and earns dividends (even with a loan against the policy).
As long as the loan is less than (or equal to) your accumulated premiums, you can take it at any time.
In this way, you can say goodbye to traditional methods of taking loans with proof of employment or income, credit scores, loan agreement, interest charges, application fees, and others.
Thus, without having to jump through hoops or pay high-interest rates, with over-funded life insurance, you can build up your own bank and draw from it at any time.
There are no limits when it comes to spending money. You can use it to buy a new car or house, pay medical bills, invest in real estate, or travel.
With over-funded life insurance, you will be able to financially protect your family and loved ones, even after you die.
Final Thoughts
We hope after reading this article that you have a clear picture of what are payday alternative loans and that it would be best to avoid them.
Fortunately, there is a better option to help you with your personal finance – Infinite Banking Concept.
We highlighted the main points of the Infinite Banking Concept, but there is so much more! Sign up for our premium membership if you’re ready to learn more and become an expert on your finances.
It’s time to start owning your own lifestyle!