How Payday Loans Bridge Financial Gaps

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By Marilyn Royce

Insufficient cash flow can create a vicious cycle for people living paycheck to paycheck. These individuals are just one emergency or unexpected bill away from financial ruin.

Families with low incomes often turn to payday loans to cover unexpected expenses. 

Payday Loans

Many people use payday loans to meet unexpected expenses, and it’s easy to get one–just walk into a store, sign some papers and write a check. 

Despite their popularity, payday loans aren’t an effective long-term solution to financial stress. They’re designed to be repaid when the borrower’s next paycheck arrives, but if that doesn’t happen, the loan often rolls over. And each rollover costs more in fees than the original loan amount.

Many states have already taken action to address this problem by prohibiting payday lending or requiring lenders to offer an alternative product with lower prices. The experiences of Colorado, Hawaii, Ohio, and Virginia—four states that have passed comprehensive reforms—demonstrate that it is possible to maintain broad access to small-dollar credit while protecting consumers from the harmful impacts of high-cost loans. This model could serve as a blueprint for other states.

Title Loans

Each year, millions of families take out payday or auto title loans. With payday loans, borrowers give lenders access to their bank account in exchange for cash that is typically repaid upon the next paycheck; with car title loans, borrowers hand over their vehicle’s title and a spare set of keys in exchange for a loan amount that is based on a percentage of their car’s value. Both kinds of products are expensive, with annual interest rates often well above 300 percent. But despite their costs, they fill an important need, and they help families deal with gaps in income or unexpected expenses.

Like payday lending, title lending is often targeted to poor communities, and research finds that the majority of borrowers are women and people of color. This is partly because these lenders have aggressively clustered their stores in African American and Latino neighborhoods. These locations also provide easy access for those who have no other options.

Cash Advances

Credit card cash advances seem like a quick, harmless way to get funds when you need them. But it’s important to keep in mind that cash advances are a different product than regular purchases and come with fees and interest charges. In addition, the cash advance balance is usually listed as a separate item on your credit card statement, and it starts accruing right away.

You can get a cash advance at an ATM, or your bank may be able to provide it for you, depending on the terms of your credit card agreement. You can also request a cash advance from your credit card issuer by phone. In addition to cash advances, many cards offer convenience checks that can be used for cash withdrawals and cashed or deposited at your bank.

These and other options are available when you need instant loans. Explore your options, and make sure you pay off the cash advance as quickly as possible.

Check Cashing

Check-cashing services can provide financial access for people without bank accounts. They are often open later than banks and have offices in locales where a bank may not be. They can also cash checks for a lower fee than banks and make those funds available immediately.

These services can be convenient, but they can perpetuate a cycle of debt and fees that drain disposable income. The average unbanked American spends 10 percent of their income on check cashing fees.

For those who are unable or unwilling to use a bank, or have a history of negative financial behavior, alternative lenders can fill in gaps and offer safe, affordable credit. It is important that families understand the costs and benefits of these types of loans. It is equally important that families have the opportunity to develop and maintain a relationship with a local bank. They may save money in the long run and gain other beneficial financial services, like a savings account or credit card.