It’s a brutal world for the small money borrower in the big city.
Consumers think payday loan stores are the only place to go if you need money for an emergency appliance repair or medical procedure or maybe even to pay the monthly rent.
Payday lenders don’t break your leg, but they may break your bank account. The average APR on a payday loan is 399%!
Good news is, there’s hope. Several payday loan alternative are available if you keep this list in mind.
Where to Get a Small Dollar Loan
Your job is to find the longest pay-back time, the lowest interest rates and the smallest fees.
- Your Bank: Shop first for small dollar loans at your local bank.
- Credit Unions: Check with the local credit union. They’re easy to join now.
- Your Employer: Ask at work. Some employers still give the old-fashioned “employee loan.” It’s a good thing.
- Online Lenders: Enter the Wild West of online personal loans, with a few best practices in mind.
- Local Nonprofits: Find your local nonprofit Community Loan Center. Or start one in your community. It’s a new and very good thing.
- Family: Do the right thing if you can: Borrow from family: mom, dad, or Uncle Harold and Aunt Bea.
Go to Your Local Banker, Credit Union, and Employer
Eliza Platts-Mills, a Clinical Professor in the Entrepreneurship and Community Development Clinic at the University of Texas School of Law, told Debt.org that the answer to your financial crisis might be right around the corner.
“Banks and credit unions are starting to offer small-dollar loans for borrowers who don’t have stellar credit,” Professor Platts-Mills said.
Joseph Otting, Comptroller of the Currency, a division of the U.S. Department of Treasury, sent a bulletin to national banks and savings associations in May of 2018, urging them to offer short-term, small-dollar installment loans to consumers. The Comptroller suggested repayment terms of two-to-12 months, as opposed to the two-week repayment period preferred by payday lenders.
“Millions of U.S. consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000 to make ends meet,” Otting said in a prepared statement. “Consumers should have more choices that are safe and affordable and banks should be part of that solution.”
You’ve got a better chance with a bank if you’ve got collateral, like a home, boat or car title to hand over.
Otherwise, don’t hold your breath. Banks are in the business of giving loans based on 1) collateral or 2) character.
Number two means they need to know you and trust you. In both cases it’s no extra effort for the bank to determine your trust-worthiness.
If the bank is faced with a stranger with no collateral, the effort required to establish whether you’re a good risk “makes the loan unprofitable for the bank,” said Robert DeYoung, an endowed professor at the University of Kansas School of Business and co-editor of the Journal of Money, Credit and Banking, in an interview with Debt.org.
“The unfortunate answer is there aren’t many places folks can go” for small dollar loans, Professor DeYoung added.
“Even when credit unions make loans, you have to be a member of the credit union and must have deposits on hand. These products aren’t going to the underserved, unbanked portion of the economy. Even payday loans go to folks who have jobs and bank accounts.”
Professor Pamela Foohey of the Indiana University Maurer School of Law says there is another reason not to hold your breath waiting for bank to give you a small-dollar loan: banks are making plenty of money financing the payday loan companies. It’s a lot more profitable than giving you a small-dollar loan.
Banks and credit unions expanding the small-dollar lending market “would benefit people and the banks and credit unions,” Professor Foohey said.
“It also would help keep or bring people into banks. People who are unbanked or underbanked often pay much more to use their own money, as detailed by Mehrsa Baradaran in her book, How the Other Half Banks.”
If you can get a low-dollar bank loan, do it.
Professor Foohey recommends “banks and credit unions over payday and title lenders, both brick-and-mortar and online.”
She also recommends banks over credit unions.
“Credit unions may require customers to take out multiple products or to put up collateral, such as a car, to secure loans that are not for the purchase of that piece of property.”
But if your bank isn’t taking the Comptroller of the Currency’s suggestion about small-dollar loans, it’s well worth checking with the local federal credit union in your community and see if its offering a PAL loan, Professor Platts-Mills said. You may have to join that credit union.
A PAL loan, or “Payday Alternative Loan,” is a small-dollar loan for borrowers who can’t qualify for the credit union’s signature loan.
A PAL loan for amounts between $200 and $1,000, may well be your friend. Its required features include a 28% interest rate, a loan application fee of no more than $20, a repayment term of one month to six months, and no rollovers.
“Another good option is a low-interest loan offered by your employer if they have one,” Platts-Mills said.
Some people are reluctant to let their company know they need a short-term loan. But it may be the least expensive option available to you.
Find a Community Loan Center, Or Start One
Community Loan Centers are a new and very good source of affordable small-dollar loans to customers seeking an alternative to payday loans. Borrowing from a Community Loan Center is better in all ways than from a payday loan front. That is if you can find one.
Professor Platts-Mills helped start the Community Loan Center movement in Texas, but it’s been slow growing. The program is currently operating in three states: Texas, Indiana, and Maryland.
They are funded by participating employers, who offer the service to employees, who need access to small amounts of credit and are unable to qualify for lower interest loans from other lenders.
The Community Loan Center in South Texas offers loans from $400 to $1,000 at 18% interest, with a one-time $20 administrative fee, for a total APR of 21.7%. It is repayable over 12 months. No credit history or collateral is needed.
In contrast, the typical payday loan in Texas carries an APR of over 500% and is due in full in a much shorter period of time. This makes it more likely that a borrower will fail to repay on time and have to borrow again, with another set of fees.
“For a $1,000 loan due in a month, the average borrower pays $775 in fees,” says the Community Loan Center web site. “We charge only $120 in fees, and we let you repay the loan in 12 months.”
A foundation or bank or employer in your community may be interested in extending affordable loan capital to a non-profit lender for valuable Community Reinvestment Act credit, or other reasons. Contact Howard Porter at Texas Community Capital in Austin, the program administrator, to learn how to start a Community Loan Center.
Online Loan Options
If you’re striking out with banks, credit unions, and your job, you still have endless choices, many online.
“The small-dollar loan market is growing rapidly with small-dollar loan offerings available online and in store fronts, from banks and credit unions, from Silicon Valley ‘fin tech’ lenders, who specialize in new technology approaches to financial instruments,” Professor Platts-Mills said.
Here are some best practice features to look for when deciding who to borrow from:
- Number one, be careful you understand the payback terms, and are confident you can meet them.
- Look for a long-term loan. “The longer the better,” Professor Platts-Mills said.
- As for interest rates, “the lower the better,” she said.
- Be wary of lenders who start with a high interest rate and promise to lower your interest rate as your credit score improves.
- Ask questions. What are the fees? Is there an administrative fee? Again, the lower the better.
- Look for a lender who allows you to renew the loan without charging another round of high fees.
- Look for a lender who reports to the credit bureau if you repay on time, which will help improve your credit score through the loan, but won’t report to the credit bureaus if you fail to pay on time.
Debt Consolidation Loans
Payday loans are illegal in states like Pennsylvania. But other options include checking out religious organizations, and government programs such as the state Temporary Assistance to Needy Families (TANF) or Low-Income Home Energy Assistance Program (LIHEAP).
A debt consolidation loan allows you to lump multiple payments under one, lower interest rate. Free, nonprofit, federally accredited credit counselors can help you line this up.
But be careful. The same rule applies: don’t borrow money you can’t pay back.
“You hear individual stories about debt consolidation or debt counseling working for people,” Professor Foohey said, “but loan consolidation does not fix many people’s initial problem of simply not having enough funds to pay the bills.”
Getting a new job, making instead of borrowing more money, is a goal worth shooting for.
It’s in the category of getting real. But when you need cash now, here’s the best “get real” option of all:
Borrowing from Family
A lot of people simply don’t have this option. But if you do, take it.
“People sometimes are hesitant to ask family members because they fear having to admit financial need or they are saving Uncle Harold and Aunt Bea for a bigger emergency,” Professor Foohey said. “But in turning to payday loans, or even debt consolidation, people are more likely to encounter that bigger emergency than if they had asked family for help initially.
“And Uncle Harold and Aunt Bea will thank their family members for coming to them before the financial situation became worse and more difficult and expensive to patch up.”
Professor Platts-Mills agrees.
“If you have family and friends who you can borrow from that might be your best option because presumably they will set repayment terms (interest, term) that you can handle and be forgiving and flexible if you fall behind.
“The downside is that you have to tell them that you are having a hard time making ends meet and you run the risk of putting a strain on those important relationships if you fall behind.”
Professor DeYoung says we’ve got too much credit in our society anyway.
Getting real means being vulnerable and brave enough to tell your family or friends you need help. They help you out and you help yourself. Everyone gets better, the world is a better place, if you pull it off the right way. So everyone is on the same page about the loan, you can execute a family loan agreement.
“If my brother or my sister needed money, I’d surely lend it to them,” said Professor DeYoung. “I wouldn’t want them to go to a payday lender.
“But if somebody doesn’t have a friend or lender to help them out, in the short run, you can draw an unending number of scenarios in which taking a payday loan makes sense.”
Professor DeYoung imagined a single mother with a broken refrigerator and no liquidity now, but hopefully in two weeks will have that liquidity.
In this case a payday loan makes more sense than other real-world things people do in hard times, such as bouncing several checks, and being stuck with even higher fees.
Or something worse that academics don’t like to think about, but happens every day.
“The dramatic answer is she goes to a loan shark,” Professor DeYoung said.
“I don’t think in context payday loans are evil,” he said.