The Gig Economy Worker’s Guide to Avoiding Payday Loans
Inside Subprime: Jan 07, 2018
By Lindsay Frankel
Just over a third of U.S. workers are gig economy workers, and this figure is expected to rise, thanks to online platforms like Uber, TaskRabbit, and others. A report by McKinsey Global Institute revealed that 20 million of them only work gigs because they aren’t able to secure better work or pay. Income varies greatly among freelancers, but those with low-paying gigs often experience financial stress due to inconsistencies in weekly income. When bills are due but payment is still on its way, gig economy workers can feel forced to turn to payday loans.
What are payday loans?
Payday loans are short-term, small-dollar loans with high interest rates. Payday loans use a postdated check as collateral, which usually coincides with the borrower’s next payday. The ease and speed with which these loans can be obtained make them appealing to people with bad credit who are in need of fast cash. But these loans can be difficult for gig economy workers to pay off, and can lead to long-term debt.
Why should gig economy workers avoid payday loans?
The Consumer Financial Protection Bureau found that the average interest rate on payday loans is close to 400 percent. Most people have difficulty paying the fees associated with payday loans in addition to their everyday expenses, and as a result, 4 out of 5 payday loans get rolled over or renewed before they are paid. Interest and fees pile on when payday loans are renewed, trapping borrowers in debt.
While some states prohibit payday lending and others set interest rate caps on small-dollar loans, others do little to protect borrowers. In Texas, which is often called the ‘wild west’ of payday lending, it costs borrowers an average of $701 to borrow $300 for five months. Even borrowers with bad credit who need access to quick cash have better alternatives than payday loans.
How can gig economy workers avoid payday loans?
Fortunately for gig economy workers, a growing number of fintech companies are developing solutions for workers with inconsistent pay. Many apps allow workers to change the timing of payday, so they can access earned income in advance. Other platforms are designed to help workers set up a savings plan or emergency fund. A growing number of employers are using technology to allow workers to instantly access their earnings.
But for gig economy workers who aren’t receiving enough pay, these solutions will do little to remedy the problem. The best option for these workers is to secure additional income.
If you must borrow money, it’s always a good idea to avoid payday loans. Try talking to banks and credit unions to see if you may be eligible for a loan with lower interest rates. If you have bad credit, consider taking out a lower-cost installment loan. With longer terms and lower interest rates, these loans are a safer choice for borrowers and help build credit for a healthier financial future.