What are the alternatives to high interest loans? – Forbes Advisor


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Maybe you’ve heard the advice never to take out a payday loan. Or maybe you applied for another type of loan with limited credit and are looking at a loan estimate with higher than expected interest rates.

Either way, if you need to borrow money, it is important to know that there are other options than applying for high interest rate loans. They may not be as easy or convenient to obtain, but in the long run, your future self will thank you for putting in the extra work.

What are high interest loans?

You might think high-interest 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) above 36% to be high interest loans.

Why Are High Interest 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 loan for $1,000 with an interest rate of 36% and pay it off over the course of a year, you will need to make a payment of $100.46 each month. By the time you repay the loan, you will have paid $205.55 in interest, more than a fifth of the total amount you borrowed. However, if your interest rate was only 6%, you would pay $14.39 less each month and save $172.75 in interest.

How to repay high interest loans

Paying off high interest loans is not easy. However, there are several ways to pay it back faster:

  • Increase your income. Ask for a raise at work, get a temporary part-time job, start a side job, or sell things at home that you no longer need.
  • Reduce your expenses. Play a game to find ways to reduce your expenses. Every dollar you save is another dollar that can be used to pay off your debt faster.
  • Start building a budget. It can help you develop positive financial habits. It doesn’t have to be as awful as you might think; there are many ways to budget these days, such as with a budgeting app.
  • Consolidate your debt. You can refinance your high-interest debt with a lower-interest loan. This process is called debt consolidation.

Alternatives to High Interest Loans

If you have poor credit, high interest loans are just one of many options available to you if you need the money. Although this type of loan may be a good choice for you in some cases, here are other alternatives to consider first:

1. Consider Alternative Payday Loans (PAL)

Some federal credit unions offer small dollar loans called PALs. However, not all credit unions offer these loans, so you will need to shop around in your area or online. In addition, you must have been a member of the caisse for one month before being eligible for a PAL.

But once you qualify, you will find that this type of loan is much better than an actual payday loan. You can borrow up to $1,000 and the application fee is capped at just $20. Credit unions can also offer more services to people looking for help managing their finances, such as free personal advice.

2. Ask your creditors to work with you

If you need help paying your bills, contact your creditors first before taking out a high-interest loan. It can be a humbling experience, but you’d be surprised how many options companies typically offer people struggling with bills.

3. Review credit counseling

You can also contact the National Credit Counseling Foundation. They can refer you to a reputable credit counseling agency who can work with you one-on-one to sort through your options and get you back on track to a better financial situation. Even better, these services are very affordable, even free in some cases.

4. Explore self-help and community support

Another option is to contact your local government and research the benefits available. This can range from financial assistance, food stamps, unemployment benefits, welfare, and Medicaid.

You may also be able to get help directly through your community. If you’re not connected or don’t know what your options are, contact 211.org (you can also dial 2-1-1 on your phone to speak to someone). This will connect you with a local United Way volunteer who can personally help you find options in your community. You can even get help anonymously if you prefer.

5. Build up your savings and credit

If you’re considering a high-interest loan, chances are you won’t have any savings or a high credit score to back you up. It’s a good time to gather your motivation and find ways to improve your credit and build up your savings so you don’t find yourself in this situation again.

To improve your credit score, pay off your existing debts and continue to make your monthly payments on time. Your payment history is a key part of your credit score because it makes up 35% of your FICO score.

You should also look for ways to reduce your monthly expenses to start saving more money without increasing your income. For example, cut out unnecessary subscriptions, reduce driving and gas mileage, ask your auto insurer for safe driving discounts, or choose to cook at home instead of eating out. Use the extra money you save after reducing these expenses to build up your savings.

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