Payday loans can wreak havoc on a person's financial life. These loans carry sky-high APRs and the penalties for late or missed payments can be extreme. Many consumers, who turned to payday lenders in a time of need, later find themselves worse off than when they started. In this series, WalletPop takes a look at the payday lending industry and some of its players: those who dole out the loans, the regulators who try to rein them in and the people who desperately take out these loans hoping for some relief. This is the third installment of our payday lending series. You can read the first part of this series here.
For people with bad credit, it often seems as if a payday lender is the only place to turn to for fast access to cash. In the past, if you truly wanted or needed a few hundred dollars in a hurry, and didn't have the credit record to convince a bank or credit union that you deserved a loan, there were few alternatives.
Luckily, things are starting to change. Here are some of the alternatives to payday loans that don't require you to shake down your grandmother in order to afford paying them off. Just keep in mind that because there is an alternative doesn't mean it's a good alternative. Be sure to read the fine print in any lending agreement before you sign.
A loan from your employer
Once or twice a year some large companies offer a low and sometimes no-interest cash advance. At smaller companies, employees can ask their employer if they can pay them earlier or get an advance on a paycheck. The trade-off is that your employer will now know you're in financial hot water. This may be only slightly more tolerable than going to your mom and dad for financial help, but we'd be remiss not to mention it.
Cash advances from banks
U.S. Bank, Fifth Third and Wells Fargo, offer customers cash advances. However, cash advances tend to be only a little cheaper than a payday loan and sometimes the interest is far higher. Generally, you take out a cash advance and pay it back the next time there's a direct deposit in your account. That works out all right if you need money, say, early in the month and won't have a direct deposit until late in the month. But if you take out a cash advance and then two days later, get a direct deposit, you've probably been hammered on the interest. Still, some people might find this a viable option.
This website is only available in Utah right now, but it will be branching out to more states soon. Zestcash is designed to be the anti-payday loan loan. They claim their loans are up to 50% less expensive, and borrowers don't have to pay back the entire amount of the loan in one payment. Instead, they can pay it back in smaller chunks over time. That said, careful -- while paying back a little at a time is a nice improvement over a typical payday lending model, it isn't necessarily less expensive.
"[I]f you are borrowing $400 from ZestCash for a total of 3 months, the loan cost is $207.62 and the total you'll pay will be $607.62." says the the Zestcash website.
On a payday loan, if you borrow $400 -- at least here in Ohio -- you'd pay back $460. That's $60 to borrow $400 instead of paying $207.62.
Now that said, for those who think they would struggle to pay back $460 in two weeks and thus find yourself in a debt death spiral, ZestCash may be the much better way to go, and while they don't show on the website what the costs are if you pay your loan back within a month or two weeks, it obviously will make the transaction a lot more affordable.
Bottom line: Flexible, yes. Cheap, no. And I haven't even discussed their "origination fees," which they lump in with the interest.
I haven't used the aforementioned ZestCash, and I've never used BillFloat, but I'll tell you, this service seems pretty promising for cash-strapped people who hate the idea of taking out a payday loan.
BillFloat.com offers a very specific type of short-term loan. If you have a bill of up to $1,000 that needs to be paid -- let's say your electricity is going to be turned off four days before your pay day, and the utility won't budge -- then BillFloat will pay your bill for you. (Your first bill, they'll pay between $40 and $225.)
What's the catch? They charge a fee, of course, but the fees seem fairly reasonable (for every $100, they charge you $6.25). Because they have your bank account information before paying your bill, it's not like they can't find you if you don't pay them back. And if you don't, they note that they might have to charge you $20 to cover bank costs.
It basically works like this: You ask BillFloat to pay your bill, and they do; within one month, they expect to be paid back, along with the fee. So if you can't make a $200 cell phone bill, BillFloat will pay that, and at some point within 30 days -- you pick the day -- they'll deduct $212.50 from your checking account.
What I like about this service is that it seems more surgical and targeted than most loans. If you take a cash advance from a payday loan or your credit card or your boss, chances are, while most of the money may go toward something crucial like your water bill or your rent, some of that money is also probably going to go toward buying a bag of Doritos or a can of pop or something else that isn't very important.
Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.
Other stories in this series:
Payday Loans: How One Woman Got Caught in a Vicious Cycle
Payday Loans: Why the Industry Says They Are a Good Deal
State Governments T ry to Run Payday Lenders Out of Town
Payday Loans: Other Places to Turn to for Fast Cash