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You may have heard the advice that you should never take out a payday loan. Or maybe you’ve applied for another type of loan with limited credit and are staring at a loan estimate with higher-than-expected interest rates.
Either way, if you need to borrow money, it’s important to know that there are options other than applying for high-interest loans. They may not be that easy or convenient to get, but in the long run, your future self will thank you for the extra work.
What are high-interest loans?
You may think that high-yield loans are the ones with triple-digit interest rates that some payday loans charge, and that’s true. But the reality of what most experts consider “high interest” might surprise you.
Many economists consider loans with an annual percentage rate (APR) greater than 36% to be high-yield loans.
Why are high-yield loans bad?
Taking out a high-interest loan means your monthly payments will be higher and you’ll end up spending more money on interest when you pay off the loan.
For example, if you take out a $1,000 loan with an interest rate of 36% and pay it back over the course of a year, you will have to pay $100.46 each month. When you pay back the loan, you paid $205.55 in interest, more than one-fifth of the total amount you borrowed. However, if your interest rate is only 6%, you’ll pay $14.39 less each month and save $172.75 in interest.
How to pay off high-interest loans
Repaying high-interest loans is not easy. However, there are several ways you can cash it out faster:
- Increase your income. Ask for a raise at work, take a temporary part-time job, start a side hustle, or sell things in your house that you no longer need.
- Lower your expenses. Make a game to find ways to reduce your expenses. Every dollar you save is one more dollar that can be used to pay off your debt sooner.
- Start budgeting. This can help you develop positive financial habits. It doesn’t have to be as terrible as you might think; Nowadays there are many ways to create budgets, e.g. B. with a budgeting app.
- Consolidate your debt. You can refinance your high-interest debt with a loan at a lower interest rate. This process is known as debt consolidation.
High-interest credit alternatives
If you have bad credit, high-interest loans are just one of several options available to you when you need money. While this type of loan might be a good choice for you in some cases, here are some other alternatives to consider first:
1. Consider Alternative Payday Loans (PALs)
Some state credit unions offer small loans called PALs. However, not all credit unions offer these loans, so you’ll need to look around in your area or online. In addition, you must have been in the credit union for a month before you are eligible for a PAL.
But once you qualify, you will find that this type of loan is far better than an actual payday loan. You may be able to borrow up to $1,000, and the application fee is capped at just $20. Credit unions can also offer more services for people looking for help managing their finances, such as: B. free individual consultation.
2. Ask your creditors to work with you
If you need help paying bills, consult your creditors first before taking out a high-interest loan. It can be a humbling experience, but you’d be surprised by the number of options companies typically offer people struggling with bills.
3. Check out the credit advice
You can also contact the National Foundation for Credit Counseling. They can refer you to a reputable credit counseling agency who can work with you to clarify your options and put you back on the path to better financial health. Best of all, these services are very affordable or even free in some cases.
4. Explore mutual aid and community support
Another option is to contact your local government and research available benefits. This can range from financial assistance, food stamps, unemployment benefits, welfare and Medicaid.
You may also be able to get support directly from your community. If you’re not connected or don’t know your options, contact 211.org (you can also dial 2-1-1 on your phone to speak to someone). This connects you with a local United Way volunteer who can personally help you find the options available to you in your community. You can even get help anonymously if you prefer.
5. Build your savings and credit
If you’re considering a high-interest loan, chances are you don’t have savings or good credit to back you up. Now is a good time to gather your motivation and find ways to improve your credit score and build your savings so you don’t find yourself in this situation again.
To improve your credit score, pay off existing debt and keep making your monthly payments on time. Your payment history is a key component of your credit score as it accounts for 35% of your FICO score.
You should also look for ways to reduce your monthly expenses to save more money without increasing your income. For example, cut unnecessary subscriptions, reduce driving and gas mileage, ask your auto insurer about safe driving discounts, or choose to cook at home instead of eating out. Use the extra money you save after cutting those expenses to build your savings.
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