If you are facing a financial emergency and need extra funds to cover these costs, you may consider taking out a loan. Many people consider taking out payday loans because they promise to provide fast money no matter what type of credit you have. These loans can be very dangerous and can actually make you worse off financially. These loans do come at a high cost which can blow out astronomically if you fail to meet payment requirements.
Below is some information about why payday loans should be avoided or thought about seriously and several alternatives that can help you through your financial emergency.
Dangers of Payday Loans
While you may think that a payday loan will solve all of your problems because it offers to give you money instantly, you will be required to pay back substantially more money than you borrowed. In fact, you are likely to be charged a 20 per cent establishment fee, which could equate to $400 on a $2,000 loan. In addition, you will be charged another monthly fee that can be as much as 4 per cent on your remaining balance, not to mention late fees. This can add up to a lot of added expenses.
You should also realise that typically the payday loan company will automatically deduct their payments from your pay cheque or your bank account. This deduction will be taken until your loan is paid in full. This will give you less money for many weeks or months to come and there is no way you can stop it. In addition, if you do not have adequate funds in your bank account, you will be charged additional overdraft fees from your bank in addition to the late fee for the lender.
Agreements with Lenders
Instead of taking a loan out, your first step should be to talk directly to each lender you owe money. Ask to speak to the hardship department of the financial institution or company you owe money. Many times, they will be willing to work a payment agreement out with that will allow you to make smaller payments over a longer period of time.
Even if you are not sure you will qualify for a bank loan, you should sit down and speak to a loan specialist at your bank. You may be surprise at what option that bank may have for you. This type of loan would allow you to make your own payments versus deducting the payments directly from your account. A bank loan is also likely to have lower fees and interest rates. You may also want to try to obtain a low-interest credit card to help you pay some of your bills. While you do not want to have too many credit cards, maintaining one or two to help you through financial emergencies may be beneficial.
The below examples are specific to Australia but other countries will have similar programs.
If you are low-income, you may qualify for a low income or Centrelink loan from a specialised lender. These are either low or no-interest loans and allow you to pay them back over several months. Here is a look at the two main loans offered by specialty programs that have been created by banks and charities.
- NILS (No Interest Loans Scheme). To obtain this loan, you must be receiving benefits through Centrelink. If eligible, you can take out a loan for up to $1,200 to cover certain expenses. This loan includes no interest or added fees and can be paid back over 12 to 18 months.
- StepUp Loans. These low-interest loans are also only for low-income people and can be used for certain things, such as car, medical treatment and a household appliance. You can borrow up to $3,000 and you have three years to pay it back.
Centrelink and Centrepay
If you are receiving regular payments from Centrelink you also have a couple of other options for obtaining the extra funds you need. You may be able to get an advance payment from Centrelink. You would be able to pay this amount back over several monthly payments and you would not be charged any interest. You may also be able to talk to the company you owe money to and see if they are willing to accept Centrepay payments. These payments will be directly taken out of your regular Centrelink payments and sent to the company you owe money.
You may also be able to find some assistance through various charities through the country. You can try various local churches, the Salvation Army and St. Vincent de Paul. These charities help people who are struggling with a financial emergency and do not require you to repay the money.
Be careful when applying for any type of loan. Always be sure to completely read through the entire loan agreement before agreeing to anything. You should first try to find a workable solution that will not require you to take out a loan. Most importantly, make sure that you will be able to make your repayments on a regular basis for any loan you obtain.