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Types of payday loans and alternatives
- Installment loans allow a customer to borrow a specific sum of money that is determined at the time the loan is initiated. Payments are then made over a fixed schedule that was agreed upon at the time of the loan agreement. A benefit for some consumers is that many installment loans can be utilized without a hard credit check and can be approved after an assessment of the customer’s personal financial situation
- Car title loans are a type of secured loan where the borrower’s vehicle title is used as collateral for the loan. Car title loans are typically short term and carry a high rate of interest. Credit scores are generally not considered by the lender. If the borrower defaults on the loan, the lender can repossess the vehicle.
- Possible offers installment loans up to $500* to customers with little to no credit history. Loans are repaid in multiple installments over a couple of months, allowing borrowers to “catch their breath.” Possible also reports payments to Experian and TransUnion, allowing borrowers to build credit history.
- Personal loans are a form of installment loan that customers can borrow from their current bank or credit union. They usually require a minimum credit score. Lending rates for personal loans are usually cheaper than those on a credit card. Personal loans also allow customers to consolidate several credit card debts into one payment plan at a lower rate.
- Payday alternative loans (PALs) are small loans, typically less than $1,000, that customers can borrow from participating credit unions that they already bank at. They have lower interest rates than standard payday loans and can be paid back over one to six months. Moreover, credit unions that participate in PAL programs will report repayments to the credit bureaus, allowing their customers to build credit.
- 401(k) loans are debts that can be taken out by a customer using their investment savings as collateral. Unlike other installment loans, 401(k) loans are garnished from your paycheck and are typically done so on a monthly or quarterly basis. While 401(k) loans are good for handling short-term financial emergencies they carry a high degree of risk for consumers who find themselves out of work as foregoing payment can cause the loan to be categorized as an early distribution of the 401(k) itself – which results in additional taxes upon the amount owed.
- Secured credit cards are a common offering at banks and credit unions, and allow customers with bad credit to secure access to a small credit limit by putting down a deposit on the card. These cards are fairly easy to obtain, and usually require $200 – $500 for the deposit. By taking on small amounts of debt on the secured credit line and paying it off before the next month, customers are able to build credit history to access higher credit score products.
Payday lenders typically charge a percentage or dollar amount per $100 borrowed. The amount of the fee can vary from $10 to $30 for every $100 borrowed, depending on state laws and the maximum amount a state permits. The most common fee is $15 per $100. For a two week loan, the $15 per $100 borrowed converts to about a 400% annual interest (APR). Depending on the loan term and the fee, some payday loans can be as high as 700% or 800% annual interest (APR). According to research from the Consumer Financial Protection Bureau (CFPB), the median online payday loan costs $ per $100 borrowed which is a 613% APR. These rates are all significantly higher than loans from Possible which are between 150% and 200% APR.