US inflation hit a 40-year high in June. While the inflation rate moderated slightly in July, consumers are feeling the pressure of rising prices and there is no guarantee that the current inflation problem has peaked. In the current economic conditions, many Americans are looking for credit, and predatory lending is on the rise.
Payday loans are short-term, high-interest loans that are designed to be repaid on the next payday. They’re easy to get but hard to cash out, often with hidden fees and extremely high interest rates. Payday lenders have been known to set up storefronts in low-income areas and plunge people into a cycle of debt.
Although not all payday loans are predatory, you should consider alternative options before getting a payday loan. Here’s everything you need to know about taking out a payday loan during inflation.
The Effects of Rising Inflation
Consumer prices rose 8.5 percent in July, down 0.6 percent from June. Despite this modest slowdown, inflation is unlikely to have peaked. As the prices of basic necessities like gas, food and shelter continue to rise, consumers are feeling the effects.
Two-thirds of Americans were living paycheck to paycheck in June. Meanwhile, American consumer personal debt is at an all-time high. With the unemployment rate currently at its lowest since 1969, it is evident that rising inflation is taking a heavy toll on consumers financially.
As gas prices begin to fall, food and housing prices skyrocket. “Consumers get a break at the pump but not at the grocery store. Grocery prices, and in particular the cost of groceries at home, continue to rise, rising at the fastest pace in more than 43 years,” said Greg McBride, Bankrate’s chief financial analyst. “The fall in gas prices was very welcome, but it doesn’t solve it not the inflation problem.”
Inflation leads to interest rate increases
To combat this rampant inflation, the Federal Reserve has raised interest rates four times this year and is expected to raise them again before the end of 2022. These rate hikes have already caused average interest rates on personal loans to rise, and with further interest rate hikes in this way, new borrowers of personal loans are likely to see higher interest rates.
This does not bode well for those looking for payday loans as these loans already have much higher interest rates than other personal loans.
Should I take out a payday loan?
Payday loans can be very tempting when you are in financial distress due to inflation and need cash fast. If you can find a payday lender that offers reasonable interest rates and you are absolutely confident that you can pay it back when your next paycheck comes, this could be a viable option. However, taking out a payday loan comes with many risks and you should only do it as a last resort.
Payday loans come with fixed interest rates, which means that the interest rate you pay does not change over the life of the loan. They are designed as short-term loans to help people cover necessary expenses between paychecks or emergency expenses. Payday loans are typically for smaller amounts, averaging $500 or less. However, they come with sky-high interest rates. The average two-week payday loan has an APR of almost 400 percent. In comparison, the average APR for a regular personal loan is just over 10 percent.
The Dangers of Payday Loans
Payday loans can attract borrowers with bad credit since most payday loans do not conduct a credit check. However, taking out a payday loan can further damage your credit score and put you in a cycle of debt that you may find difficult to break out of. It is very common for payday loan borrowers to have difficulty repaying the loan at the end of the two to four week loan term, resulting in them taking out an additional loan to meet the payment deadline.
Almost 1 in 4 payday loan borrowers take on additional borrowing nine times or more after the first credit. Low-income communities are particularly vulnerable to payday lenders, and black and Hispanic communities are being disproportionately targeted.
Alternatives to payday loans
There are several alternatives to payday loans even if you don’t have strong credit.
There is no minimum credit score to qualify for a credit card, although individual cards have requirements. Although you shouldn’t make a habit of racking up credit card debt, using a credit card to help cover expenses is a better option than taking out a payday loan.
Credit cards have much lower interest rates than payday loans, and you have 30 days to pay off your credit card balance before interest accrues.
Borrow from a credit union
If you have time to join a credit union and go through the application process, borrowing from a credit union could be a good option. Credit unions typically have lower interest rates than traditional lenders, and many offer alternative payday loans (PALs) that let you borrow $200 to $1,000 for one to six months. These loans have an APR cap of 28 percent.
Personal Loans for Borrowers with Bad Credit
Online personal loan lenders typically have quick approval and funding times, and many online lenders are open to working with borrowers with bad credit. While borrowers with bad credit are likely to get the highest interest rates from any lender, most personal loan borrowers cap their APR to about 35 percent, which is still much lower than payday loans.
If you are interested in taking out a personal loan, you should compare and pre-qualify with top lenders before making a decision. Small personal loans are also worth looking into, especially if you don’t have a large sum of money to borrow.
If you need immediate help, federal and local programs are available. For example, the Emergency Rental Assistance Program was established to help families cover rental and utility costs in times of need. If the cost of groceries is an issue, it might be worth visiting your local food bank to ease the strain. It’s also worth checking if there are nonprofits in your community that offer help with expenses like rent and children’s back-to-school expenses.
Alternative ways to earn income
If you have items you want to part with and need money for essentials, it might be worth selling things like clothing and jewelry online or at a pawn shop for extra income in a pinch. If you have an extra room in your home, you can rent it out through Airbnb or find a roommate to reduce rent or mortgage costs.
As inflation continues to soar, people are struggling to pay their bills and are looking for ways to supplement their income. While payday loans are a quick and easy way to put food on the table or fill your tank with gas, they’re incredibly dangerous.
A payday loan could leave you in debt and ruin your credit. If you are struggling financially and are considering a payday loan, consider the alternative solutions listed above and see if they work for you before making that decision.