Inflation has hit people, who are already struggling to put gas in their tanks and food in their fridges, particularly hard. For many, a payday loan seems to be the only way to get the money they need.
In recent years, however, more and more states have placed restrictions on risky, short-term borrowing, and new lenders have emerged offering lower-cost small loans, making it easier than before to find affordable credit that doesn’t plunge you into unmanageable debt.
In some states, new laws mean better credit
There is currently no federal law on maximum interest rates for small loans; Rather, the states decide whether to cap payday loan installments. As a result, the cost of a few hundred dollars’ worth of credit often depends on where you live.
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In recent years, four states – Colorado, Hawaii, Ohio and Virginia – have passed laws that effectively lower the cost of small loans and give borrowers longer repayment periods. A study by The Pew Charitable Trusts, published in April, found that payday lenders continued to operate under the reforms, but with more secure credit.
Although some new lenders did business in those states after the laws went into effect, the primary impact was that existing payday lenders consolidated their storefronts and made their loans more affordable, says Alex Horowitz, a senior research officer at Pew.
National banks and local credit unions step in
A bank or credit union might not have been your go-to place for a small loan in the past, but it might be today.
Seven major banks have begun offering small loan options with low APRs, or announced plans to offer them, in recent years, Horowitz says, including Bank of America, Wells Fargo and Truist. These loans are available to existing bank customers nationwide, regardless of government interest rate limits.
Banks rely primarily on their customers’ banking history, rather than their creditworthiness, to determine whether they are eligible for a small loan. The loans — which start as little as $100 — are typically repaid in monthly installments at an APR of no more than 36%, the highest rate an affordable loan can have, consumer advocates said.
“The fact that banks are starting to offer small loans could turn the entire payday loan market upside down,” says Horowitz.
Local credit unions have membership requirements and are less well known than payday lenders, so they’re often overlooked by people who need a quick buck, says Paul Dionne, research director at Filene, a think tank focused on helping credit unions serve their communities .
But if you can walk to your local credit union, chances are you qualify for membership, he says.
That’s because credit unions often serve people who live or work in their communities. These organizations have strived for financial inclusion by better tailoring their products, like loans, to the needs of their customers, says Dionne.
“Credit unions are getting better and better at actually having the best product and not saying no, but figuring out what the best fit is for this person coming in,” he says.
Other borrowing options
Even in states where laws aim to ban payday loans outright, people can find alternatives to risky borrowing, says Charla Rios, small loan and debt researcher at the Center for Responsible Lending.
You may be able to work out a payment plan with your utility company or borrow from a friend or family member, she says. Here are a few borrowing options to consider before getting a payday loan.
salary advances. Some companies, including Walmart and Amazon, give their employees early access to a portion of their paycheck as a workplace perk. This can be an interest-free way to borrow money if your employer offers it, but since the repayment comes from your next paycheck, it’s best to use it sparingly.
cash advance apps. Apps like Earnin and Dave let you borrow a small amount of money before payday, typically $25 to $200. They sometimes charge for instant access to your money or ask for voluntary tips. They also take repayment from your next paycheck.
“Buy now, pay later.” For necessary expenses, a Buy Now, Pay Later loan allows you to purchase an item with only partial payment. You pay the balance in equal installments, usually over the next six weeks. This type of financing can be interest-free if you pay the entire balance on time.
Low-interest installment loans. Depending on your credit rating and income, you may qualify for an installment loan with an APR of less than 36%. These loans are for amounts ranging from $1,000 to $100,000 and are repaid over longer terms, typically two to seven years. Online lenders that offer bad credit loans often qualify you for a loan with a soft credit pull, which allows you to compare loans without affecting your credit score.