The Part-Time Employee’s Guide to Avoiding Payday Loans
Inside Subprime: Dec 7, 2018
By Grace Austin
While a part-time job offers more financial security than unemployment, it can be extremely difficult to make ends meet on a part-time income, especially for those making low wages. Part-time employees are also less likely to be offered benefits through their employers, such as health insurance. Five percent of part-time employees have turned to payday loans in an effort to bridge the gap between paychecks. But with limited income, these risky loans can be difficult for part-time workers to pay back.
What are payday loans?
A payday loan is a small-dollar, high-cost loan intended to be paid off in a short time period, typically by the borrower’s next payday. To take out a payday loan, you only need a bank account, proof of income, and identification. These no credit check loans are often easier for part-time employees to access than traditional forms of credit, but the fees associated with payday loans can drown borrowers in debt. Although payday loans are supposed to be paid back quickly, 4 out of 5 payday loans are renewed or rolled over within 14 days. Most payday loans are issued to chronic borrowers who end up paying more in interest and fees than the loan principal.
Why should part-time employees avoid payday loans?
With limited income, part-time employees are likely to have difficulty covering their expenses, let alone the fees associated with a payday loan. Payday loans are advertised as a fast cash solution during an emergency, but they cause more financial strain than most cash-strapped individuals can handle. Payday loans can have 400% APRs or higher, making them much more costly than traditional forms of credit. And while some states have caps on interest rates or other protections for borrowers, others do little to regulate these predatory lenders. For example, payday loans in Idaho carry an average annual interest rate of 582 percent, according to 2016 data from Pew Charitable Trusts.
How can part-time employees avoid payday loans?
The best defense against needing to borrow money is to secure additional income. This might mean finding a second part-time job to make ends meet. There are a >handful of companies that offer benefits to part-time employees, but this is a rare scenario. Low-income workers who do not receive health insurance through their employers should check to see if they are eligible for government assistance programs like Medicaid. You can also curb healthcare costs by visiting a free or sliding scale health clinic in your area. Other government programs and nonprofit organizations can provide assistance with food and rent costs.
Part-time employees need to set especially strict budgets and set aside savings for emergencies. These strategies can help you in the future, but if you’re in a temporary bind, know that there are alternatives to payday loans. Talk to banks or credit unions to see if you qualify for a lower-cost loan, or consider a no credit check installment loan with lower interest rates and longer terms. Unlike payday loans, some installment loans will help you to build credit (if your lender reports on-time payments to the credit bureaus), so you can begin the path towards a healthy financial future.