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Money! There are a million reasons why you need them. Unfortunately, hard times come in the most inappropriate moments. If you find yourself needing a considerable amount money on the spot, there are a few different routes you can take. You should not feel ashamed if this happens to you.
A survey shows that almost half of Americans (47%) would have some trouble in finding some money ($400) for an emergency. Most people first think about borrowing from friends and family members, sometimes even without paying interest. Although this is one way of getting your hands on some cash, it is not the only one. Any additional budgeting problems and you are not only left with debts, but with broken social relationship as well.
Other options include credit cards, personal loans from a bank and payday loans, an increasingly popular product offer coming from financial credit institutions. We will analyze in detail the pros and cons of these options.
To help you decide on a product, first take this small quiz to assess your needs and payment capabilities.
- How much money do you need?
- Can you afford to repay the necessary amount per month, including the interest?
- How long do you think it will take you to pay your debt?
- What other debts do you already have that could interfere with this?
These are products offered by banks or other financial institutions, and most of them don’t require a collateral, like placing a second mortgage or your home or your car. The value usually starts at about $1,000 and goes up to $35,000. Depending on the amount, the repayment term, and the applicant’s FICO score, the interest rate varies between 10% and 30%.
Since the associated risk is medium, the issuing company will take some caution measures. The rules are not so strict as for a house mortgage. Lenders still require at least proof of residency, bank statements, and income statements. In the case of self-employed, the number of documents is higher. You must also show the office address proof, proof of residence or office ownership and, most importantly, evidence of the business’ continuity.
The waiting time to get approval is a few days, no more than a week. Once you get the go, you will pay monthly installments. Diligence in repaying personal loans has a positive impact on your credit score. Lenders work with all three credit bureaus and include this information on your FICO.
Be sure to check with your lender if they have any restrictions about the way you intend to spend the money. Some credit institutions will not finance gaming debts and student tuition.
When you find yourself in trouble, your score doesn’t look very good, and you just look to fill in some cash gaps quickly, you might think about taking out a payday loan. These start at $100 and usually no company will give you more than $1,500. In fact, since these loans can have interest rates over 300% you would not want it.
One advantage here is that you are not required to have any credit history. You can have a ridiculously low FICO score, and you will still get the money, usually the same day. The only requirements are to be 18 years old, with a steady job that pays a salary into a US bank account.
Also, these types of borrowing don’t go on your credit history, so you don’t have to worry about ruining your score. If you can’t pay it, just renew it to avoid default. On the downside, be ready to have high-interest rates, starting at 25%. It makes no difference that you are only taking a couple of hundreds for less than one month. The real danger with payday loans is the incapacity to repay them on the stated date, leading to getting an additional loan, at a higher interest rate. Renewing a payday loan, a couple of times can make you pay up to 1000% in composed interest rates.
A mixed breed
The Consumer Financial Protection Bureau (CFPB) is aware of the damaged caused by predatory lenders and has taken some corrective action. Through a recent law project, they try to protect the borrower and force the lending companies to assess the ability of the client to repay the loan while still meeting basic living needs.
This has led to the creation of a mix between installment loans and payday loans. The new product still gives only a small amount but can be repaid over a longer period. However, due to the longer repayment term, the total amount that the client will pay is also bigger due to interest. Sometimes the value is two or three times the initial sum, which also qualifies it as a predatory amount. This is nothing short of a textbook predatory loan, yet over 12 million Americans still use these products as a way to make ends meet.
You should only use payday loans as a last resort solution to stringent needs that could arise in a household. Qualifying situations include out-of-pocket medical payments, replacing a large household item or paying for some valuable education. Choosing this solution should be an isolated event, and under no circumstances, you should let it become the norm. Also, restrain from renewing such a loan since you only add unnecessary expenses in interest and go in a never-ending debt cycle.
Yet, not all clients who choose payday loans have low scores and no other options. In fact, if you are worthy of financial trust, you should apply for a credit card. Not only is the maximum limit above what a payday loan can offer, but the APR starts with 0% for a period ranging between 3 and 12 months. When that time is up, the APR will be between 12 and 27%, still significantly lower than a payday loan.
Clients who don’t qualify for a credit card can still go for a personal loan. Although it holds a higher interest rate, over time, it acts twofold. First, it offers them the money they need almost on the spot. Secondly, it helps them build their credit score, which, over time, decreases rates and gives access to more affordable money.