Andrew Schrage, co-owner of Money Crashers Personal Finance (MoneyCrashers.com), says in extreme cases, people can always file for bankruptcy. "But keep in mind that this ruins your credit score, which takes years to rebuild," he says.
Schrage says one way out may be to generate more income. "You can conserve energy to reduce your monthly bills," he says. "Sell your unneeded electronics online, have a garage sale, start a side business — the possibilities are endless."
Evans list of alternatives to taking out payday loans isn't pretty. "One product people move into is to overdraw their bank account and then pay those fees," Evans says.
Bankruptcy is another "option."
People can borrow on a credit card.
They can do installment loans or collateralized loans (like title or pawn loans).
People can borrow against their home equity.
Each of these loans has a different maturity and level of collateralization, Evans says.
Fox says the first line of defense against using payday loans is an emergency savings account. "People say they can't afford to save money," she says, "but you can't afford to pay $75 to borrow $500 every payday either."
Fox says for a family making $25,000 a year, just $500 in an emergency savings account will make it eight times less likely they would take out a payday loan, she says.
The best time to set aside an emergency fund is during tax season when people get their earned income tax credit and child tax credit. Then, if there is an emergency or an interruption in income, people can borrow from themselves and pay themselves back when they can. This puts less stress on a family than borrowing that money and having to pay it all back on the next paycheck with fees.
Lower cost small dollar loans are sometimes available at credit unions.
"(When payday loans are not available) people do what you do when you run short of money," Fox says. "They juggle their finances, ask their family for help, ask for more time to pay their bills, ask for an advance on their next paycheck — the things people have always done when they have trouble making ends meet."
Schrage thinks a personal loan from family or friends is the best resource for help in lieu of payday loans. "If you can secure a loan from a friend or family member, do yourself a favor and put the agreed upon terms in writing to protect both parties," he says. "Also, whatever terms are agreed upon, stick to them as best you can. This way, your loan won't have any negative effects on your personal relationships."
There are also short-term credit union loans. "Some credit unions offer short-term loans with better rates than payday loans," Schrage says.
And there are always credit cards.
"It is certainly much less expensive to take out a cash advance on your credit card — it is still pricey, but it is much less expensive than getting a payday loan that has to be paid back at one time," Fox says.
But, surprisingly, a study in the May 2009 American Economic Review on "Payday Loans and Credit Cards" found that "most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans."
In other words, they could have borrowed that money on their credit cards at a much lower interest rate.
Why don't they? Evans thinks a payday loan forces people to pay back the money sooner. "They are committing themselves to pay it off," he says.
Martin thinks the problem is financial literacy and a general culture of immediacy. "The real problem is people are not aware of how much money is coming in and how much is going out," Martin says.
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