Payday Loans and Alternative Options

Posted on May 20th, 2013

**Today’s guest post is contributed by Christian.**

If you want to maintain a healthy credit history, stay away from payday loans.
A recent Consumer Financial Protection Bureau report shed light on how damaging these pay-advance options can be. Check out the study yourself to get the full picture. You’ll likely notice how the fees can quickly add up since the fee is calculated as a fixed dollar amount per $100 borrowed.

Or maybe you’ll see that the median amount borrowed was $350. Perhaps the fact that 14 percent of borrowers had more than 20 payday loan transactions in a 12-month period stands out to you. But the most impactful statistic highlights how toxic payday loans can be.

Two-thirds of consumers in the report took out at least seven payday loans in a year. These consumers often opened a new loan within a day of closing one, but most often opened a new loan within 14 days of closing one. Payday loans basically become a constant source of cash in place of paychecks.

So how do you avoid the payday loan trap when you need money in advance? Take a look at these options.

Credit Cards

Being smart with a credit card is a great financial move. As long you’re paying the balance of in full every month, credit cards are much safer than payday loans. Swipe a card and pay it off as soon as you get your paycheck. You may even be able to take out a cash advance on a credit card. The interest rate will still be high, but even if it’s 40 percent, it’ll cost far less than 300 to 500 APR on a payday loan.

Small Loans

Credit unions and small banks can offer loans in small amounts with better interest rates and repayment terms than a payday loan. It’s best to find one with a repayment period of no less than 90 days that can be repaid in installments. This way you’re not constantly paying fees like a payday loan borrower does every two weeks.

Paycheck Advance from Employers

If you’re fortunate enough to have a benevolent employer, you could get a paycheck advance. It’s the same concept as a payday loan, but there’s no interest and it’s your money so you won’t fall into debt.

Borrow Money from Friends or Family

For consumers who don’t need much money in advance, ask friends or family for some help. Chances are they won’t ask for an interest rate, but don’t burn bridges by never repaying them.

Use Your Emergency Fund

There’s a reason personal finance blogs advocate building an emergency fund. When an unexpected expense pops up, you’ll be ready to use these dedicated savings.

Live Within or Below Your Means

No matter what, this is a good mantra to live by all the time. Spend money within your means and you won’t even need credit cards or cash advances of any kind. Evaluate your needs versus your wants and cut expenses from the latter.

Put simply, payday loans should be the absolute last option when you need money in a pinch. Choosing to use a payday loan puts you and your credit history at serious risk.

Christian

Christian Losciale is a writer and social media specialist for Smart Military Money. When he’s not working, he competes at bike polo tournaments and works on Sudoku puzzles. Connect with him on Google+.

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The Unbanked Population

Posted on April 22nd, 2013

bank

**Today’s guest post is contributed by John.**

For one out of four Americans, “cash only” is a way of life. 17 million Americans lack access to any type of formal bank account and are classified as “unbanked.” In addition, 51 million Americans do access basic bank services such as a savings account, yet they still rely on alternative financial institutions as well. These individuals might frequent check-cashing joints, fall prey to payday lenders, and often incur exorbitant fees associated with such alternative banking methods.

Why are so many Americans unbanked?

A common stereotype of the unbanked or underbanked is that they remain shut out of traditional financial institutions due to personal choice or area of residence. However, the large majority of unbanked individuals cite simply not having enough money as the reason for lacking a bank account. Minimum balance requirements, monthly fees, overdraft charges, and other restrictions deter many people from seeking to invest in a checking account. Furthermore, 15% of the unbanked and underbanked remain so due to a spotted banking history or their inability to provide sufficient personal identification.

How can the unbanked improve their situation?

Moving from a cash-only lifestyle one day to being fully connected to a bank, complete with a checking account, savings account, debit card, and more can make for a harsh transition. Instead, many banks, non-profits, and state and local officials have teamed up to create pathways for the unbanked and underbanked to move towards more traditional banking methods.

Financial EducationThe process of opening a checking account and subsequently managing it is a daunting process, especially for those who have unsuccessfully held an account in the past. Many banks have opportunities for customers to learn about basic money management skills to ensure against over withdrawals and account closure. Recently, 81% of banks surveyed by the FDIC stated that they offered counseling for customers in need and 96% offered formal educational courses and seminars.In California, the “Bank On” initiative has stepped up to fill the gaps in education and guidance that banks do not provide. Each participating city in the “Bank On” initiative provides resources for individuals to find a bank or credit union that meets their requirements. The local “Bank On” then subsequently brings together a network of local non-profits to guide each client by providing appropriate financial education.

Second Chance AccountsFor those 15% of unbanked/underbanked customers who are denied access to checking accounts, financial education may not quite be enough to reenter the formal banking world. Many have been rejected from opening a bank account due to past missteps. In this case, a “second chance” checking account is key. Many banks are offering these to customers who have had trouble maintaining an account in the past. For example, Wells Fargo, Chase, and PNC all offer such accounts. Aside from big national banks, many local banks and credit unions also offer more appealing terms for the unbanked/underbanked.
However, these accounts might not always be the best bet for unbanked consumers. They can sometimes carry higher minimum balance requirements and higher fees, as they are considered a higher risk for banks to maintain.
Mobile BankingThe unbanked and underbanked are indeed highly connected to mobile services. 91% own mobile phones and of those individuals, 57% own smartphones. Mobile banking is a great way for these consumers to access and manage their account from anywhere, and at moment’s notice. Low balance text alerts, payment due alerts, and savings alerts keep customers aware at all times, helping them avoid overdrafts and penalty fees.

With attention growing in the media towards the unbanked/underbanked populations, more banks and service providers are offering competitive products for those seeking re-entry to the banking world. Keep an eye on the fine print and an ear towards financial management classes for a smooth transition to bankdom.

John Gower is an analyst for NerdWallet, a personal finance website dedicated to helping consumers find free checking accounts, the best CD rates, rewards credit cards and more.