Module 1.3: Avoiding payday loans and other schemes
Payday loans, rent-to-own stores, and pawn shops may help you make ends meet, but they do are incredibly disempowering in the long run (Karger, 2015). Learn about alternatives here.
You may take a payday loan not because you mismanage your money, but because there is literally no other way to pay your bills, given your income. An obvious requirement for avoiding payday loans, rent-to-own stores, and pawn shops is to build up a cushion of money that you can rely on. This may be easier said than done. Looking at the totality of your financial situation. Performing interventions that result in dollars saved or additional dollars earned may help, such as reducing cell phone bills and selling unneeded items on Craigslist.
People who take payday loans often have bad credit or no credit history. If you have a credit card, taking a cash advance against your credit card is almost always a better option than taking out a payday loan. This is because credit card cash advances typically charge 25–30% APR, plus a nominal fee, whereas payday loans typically charge well over 200% APR. Credit card cash advances are still a bad deal—just much “less bad” than payday loans.
Fixing your credit history is important. If you have bad credit, look at module 3.3 of this course for info on getting derogatory marks removed, and how to avoid them in the future. Then, you will be able to start building your credit with a secured credit card, which will lead to you being able to get unsecured credit cards. While credit cards are another dangerous financial tool, their interest rates are far lower than payday loans.
Pawn shops offer loans against collateral—physical items you give them. They typically offer you a loan for 20 to 30% of the value of an item. Even if you repay the loan and reclaim your item, they charge high interest rates and fees. Rent-to-own stores are also nefarious; you will usually pay at least 10 times the value of an item if you rent it for the full period. Keeping money saved will help you avoid needing these toxic services.