Filed under: Personal Finance, Lynnette Khalfani-Cox
The $40 billion a year payday loan industry is booming thanks to high unemployment and a lack of access to traditional bank credit. While most individuals typically think about payday lenders doing business mainly with poor people and minorities, the
Wall Street Journal reports that payday loans are also increasingly being used by middle class and wealthy Americans who've fallen on hard economic times.
But it doesn't matter whether you're earning $20,000 a year or $200,000. If you've ever taken out a payday loan, you know they don't come cheap. Annual interest rates of 400% or more are common, and that's just one of
the dangers of payday loans.
Fortunately, there are many better, less costly alternatives to payday loans. Here are 10 other sources of funds you can turn to when you need cash fast:
1. Obtain a Payroll Advance from Your Employer
Instead of heading to a local payday lender, march into your employer's HR Department to inquire about whether a payroll advance is possible. Companies don't typically publicize this option to employees. But ever since the
Great Recession, a growing number of employers have began offering payroll cash advances and loans to workers, according to Alice Whinnery, CEO of
LFE Institute, which provides information on financial literacy in the workplace.
2. Get Financial Help from a Local Non-Profit Organization
Regional non-profits and local community development groups are increasingly providing financial assistance for those in dire financial straits. So do a Google search for non-profit organizations in your town and contact a few to see about loans.
For example, in Arkansas, a group called
Arkansans Against Abusive Payday Lending, provides borrowers with loans up to $500, which can be repaid over six to 16 months. The organization, comprised of 36 consumer, military and faith-based groups in the state, has been so effective that it helped drive payday lenders out of Arkansas altogether. As of August 2009, there are no payday lenders in Arkansas.
3. Use a Credit Card Cash Advance or Balance Transfer Check
A credit card cash advance typically involves a fee of 1% to 4% of the loan amount. Plus, the interest rates on credit card advances are now running anywhere from 15% to 25%. But that's still far better than what you'll pay if you resort to a payday loan. Besides, when used strategically,
a credit card balance transfer may even help improve your credit score.
4. Get a "Small Dollar Loan" from a Bank
Even though the credit crunch has made it a lot tougher to get bank loans, many financial institutions are nevertheless launching new initiatives to compete with payday lenders. As of January 1, 2011, nine federally-insured banks began a new pilot program called
FDIC Model Safe Accounts. One key feature of this program: "
small dollar loans" of up to $2,500, approved in just 24 hours. Meanwhile, under the
Bank On program, lenders nationwide are expanding their efforts to provide small, fast loans to borrowers in need.
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Insurance Protection Against Disasters
Flat Tires, Lock Outs and More
A number of things can go wrong with your car. Maybe you hit a pothole on your way to work and suffer a flat tire. Perhaps you mindlessly locked your keys inside your car. It's possible that your gas gauge malfunctioned and you ran out of gas. If you added roadside assistance coverage to your car insurance policy, you're covered for most of these things. For example, Progressive's Emergency Roadside Assistance coverage includes towing, flat-tire changes, battery jumpstarts, emergency fuel and fluid delivery and locksmith service. Roadside assistance coverage is optional and relatively cheap.
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Insurance Protection Against Disasters
Your Drunk Friends
If you've just hosted a rollicking party but one of your guests left drunk and caused an accident, the finger of blame could point at you. In most states, you can be held responsible for his actions and find yourself in court. If a civil claim is filed against you, your home insurance pays for your legal representation and any damages the court awards -- up to the limits of your policy. It's important to have adequate liability coverage. Most insurance agents recommend buying liability coverage between $300,000 and $500,000.
Insurance Protection Against Disasters
Family Grave Markers
If a grave monument on a family plot has been vandalized or otherwise damaged, such as struck by lightning, it may be covered, depending on your insurance company. Many companies provide up to $5,000 for damage to a grave marker, including headstones, monuments and urns, according to III. However, policies generally exclude damage resulting from a catastrophe, such as a hurricane. There's no additional charge for this coverage.
Insurance Protection Against Disasters
Your Naughty Dog
Say your normally mild-mannered tail-wagger has a bad day. One of your neighbor's children wants to play but your pooch isn't in the mood and responds negatively. The bite causes the child an injury that requires hospitalization. Your neighbor sues you, seeking reimbursement for the child's medical bills. Depending on what breed of dog you own, where you live and your insurance company, home insurance may have you covered. Some home insurers have lists of breeds and crossbreeds they will not insure; other insurers consider such breeds on a case-by-case basis, or charge more for certain "biting" breeds such as pit bulls. Check your policy or call to see if you have coverage.
Insurance Protection Against Disasters
Stolen Gifts
We've all stashed purchases in our car in a mall parking lot and gone back in for more shopping. But car insurance does not cover personal possessions that are stolen from your vehicle. Fortunately, theft of personal property is covered under your home insurance. You'll need to file a police report and pay a deductible to make a theft-related insurance claim. If your receipts are stolen along with your gifts, you will need to document your purchases, perhaps by obtaining duplicate receipts from the stores.
Insurance Protection Against Disasters
Flat Tires, Lock Outs and More
A number of things can go wrong with your car. Maybe you hit a pothole on your way to work and suffer a flat tire. Perhaps you mindlessly locked your keys inside your car. It's possible that your gas gauge malfunctioned and you ran out of gas. If you added roadside assistance coverage to your car insurance policy, you're covered for most of these things. For example, Progressive's Emergency Roadside Assistance coverage includes towing, flat-tire changes, battery jumpstarts, emergency fuel and fluid delivery and locksmith service. Roadside assistance coverage is optional and relatively cheap.
Insurance Protection Against Disasters
Those Reckless Friends
If you loan your car to a friend for a few hours and he crashes it, your own insurance policy will come to your rescue. (It doesn't matter whether or not your friend is insured, because your policy kicks in on your car.) Your policy insures your vehicle plus "you, any relative and anyone else using your car if the use is with your permission." Even if your friend has his own car insurance, your insurance will pay for damage caused to others and, if you carry collision insurance, for damage to your car. However, you'll have to pay your deductible for any collision claim.
Insurance Protection Against Disasters
Bad Checks, Fake Cash and Other Fraud
If someone writes you a bogus check, your credit card is stolen or you unknowingly accepted counterfeit cash, you could be covered. According to the Insurance Information Institute (III), home insurance coverage can include unauthorized use of credit cards, forged checks and counterfeit cash. However, policy limits are generally very low, such as $500.
Insurance Protection Against Disasters
Your Stolen Gun
Say your teen invites a few friends to your home and later you discover that your .40 caliber semiautomatic handgun is missing. You would report the theft and your home insurance will likely cover it. Most standard policies cover theft of firearms for up to $1,500. If you own an extensive collection of guns, consider purchasing extra coverage.
Insurance Protection Against Disasters
Your Child's College Dorm Room
If a thief robs your child's college dorm, your home insurance policy should have you covered. Most home insurance policies will extend coverage to theft of personal belongings in your child's dorm. However, coverage does not extend to an off-campus apartment rented by your child; for that you'll need renter's insurance. Also, your child must be a full-time student and be considered your dependent for coverage to apply.
Insurance Protection Against Disasters
Terrorism
Hopefully, it will never, ever happen, but in the unlikely event that a terrorist group bombs your neighborhood, your property is covered under both your home and car insurance policies. Standard homeowners insurance policies include coverage for damage to property and personal possessions resulting from an act of terrorism. If your car is damaged or destroyed in a terrorist attack, your car insurance policy will cover the damage if you have purchased comprehensive coverage. But if you carry only liability coverage, your car would not be covered.
While terrorism is covered, acts of war are excluded. After an attack, the government would declare whether it is terrorism or war and your insurance will respond accordingly. Note that biological and nuclear attacks are not covered.
Insurance Protection Against Disasters
5. Request a Loan from a Credit Union
In an effort to stem loan defaults and delinquencies, many large banks have reduced lending to individuals. Meantime, credit unions have been stepping in to fill the gap. Credit unions provide small, short-term loans to their members and you can join one based on any number of affiliation requirements, such as where you live or work. Find a credit union in your area via the
National Credit Union Administration.
6. Seek cash from a Peer-to-Peer Lending Group
Just as credit unions have gained in popularity, so too have peer-to-peer lending groups, such as
Lending Club or
Prosper. But as businesses like
VirginMoney have closed up shop, gone are the days when virtually anyone could get cash from a peer-to-peer lender. Now, the individuals who supply loans through these lending circles want you to have at least halfway decent credit to get a halfway decent interest rate.
7. Tap a Life Insurance Policy
If you have a life insurance policy - a
whole life policy, not term life - it may have built up cash value over the years. You can tap into this money quickly and easily by taking a loan against your insurance policy (a first step) or cashing out of the policy altogether (a last-ditch move).
8. Return a Recent Purchase
Are you in a financial bind because you've overspent? If you did a little too much shopping during the holidays or for some other special occasion, that may be the cause (partially, at least) of your current economic woes. Rather than going to a payday lender, head straight back to the retail store or establishment where you recently made a purchase, return the merchandise you bought, and get a refund. Also, to avoid future overspending, read this
advice for shopaholics.
9. Donate Blood Plasma - or Other Bodily Fluids
College students and others have done this for years when they're in a financial pinch. It could be that the college crowd is more likely to hear about medical research projects or other health care-related offers in which they can get paid. But you don't have to become a medical guinea pig to score a few bucks (unless you want to). Instead, just find a local hospital, clinic or health care facility that pays people who want to donate blood plasma, or other bodily fluids (translation: sperm). One such source for donating blood plasma is
BloodBanker. Depending on the city in which you live, you can net up to $50 per donation.
10. Dip Into Your 401(k) plan
It pains me to offer this tip because I typically
warn people not to raid their 401(k) retirement plans prematurely or unnecessarily. But if you're at the point of seriously considering a payday loan, I'd reluctantly say: Go for a 401(k) loan, or even take a 401(k) withdrawal, instead. Even though the withdrawal will ultimately force you to pay a 10% penalty on the amount you take out, plus ordinary income taxes, I'd still recommend this route over getting a payday loan.
My rationale is simple: payday loans are like economic crack. You may feel a quick rush (or at least a sense of relief) from getting that fast cash. Perhaps you'll even promise yourself (like many people who 'experiment') that that you'll do it "just this one time." But don't kid yourself: payday loans are addictive and destructive.
Once you go down the path of getting a payday loan, it's hard to turn back. That's why the average person who gets a payday loan typically rolls them over, getting an average of one payday loan per month, or 12 in a year. And payday loan customers who use "roll overs" wind up paying over 1,000% in interest, according to a study by Georgetown University researchers. That's a deal-breaker for me. Use the 401(k) money instead.
Next week: Read Part Two of this article for the final 5 alternatives to payday loans, plus my final words of advice on finding alternatives to payday loans.
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Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller
'Zero Debt: The Ultimate Guide to Financial Freedom.'
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Lynnette Khalfani-Cox, 
Rebecca Brody is a relationship coach and columnist in NYC. She hosts 
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