Inflation in the United States hit its highest level in 40 years in June. While the inflation rate eased slightly in July, consumers are feeling the pressure of higher prices, and there is no guarantee that the current inflation problem has peaked. Given the current economic conditions, many Americans are looking for loans, and predatory lending is on the rise.
Payday loans are short-term, high-interest loans that must be repaid on your next payday. They are easy to obtain but difficult to repay, often with hidden fees and extremely high interest rates. Payday lenders are notorious for setting up storefronts in low-income areas and can throw people into a cycle of debt.
Although not all payday lenders are predatory, you should consider other options before getting a payday loan. Here’s everything you need to know about taking out a personal loan in times of inflation.
The impact of rising inflation
Consumer prices rose 8.5% in July, down 0.6% from June. Despite this slight slowdown, it is unlikely that the inflation rate has peaked. As the price of basic necessities like gasoline, food and housing continues to rise, consumers are feeling the pinch.
Two-thirds of Americans were living paycheck to paycheck in June. Meanwhile, US consumer personal debt is higher than ever. Given that the unemployment rate is currently the lowest since 1969, it is clear that rising inflation is putting severe financial pressure on consumers.
As gasoline prices have started to fall, food and housing prices are skyrocketing. “Consumers take a break at the gas pump, but not at the grocery store. Food prices, and in particular food-at-home costs, continue to soar, rising at the fastest rate in more than 43 years,” said Greg McBride, Bankrate’s chief financial analyst, “ Lower gas prices have been very well received, but this does not solve the inflation problem.
Inflation leading to interest rate hikes
To combat this runaway 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 pushed up average personal loan rates, and With more rate hikes on the way, new personal loan borrowers will likely see higher interest rates.
This does not bode well for those looking for payday loans, as these loans already have much higher rates than other personal loans.
Should I take out a personal loan?
Payday loans can be very tempting if you’re struggling financially due to inflation and need cash fast. If you can find a payday lender that offers decent rates and you’re pretty sure you can pay it back on your next paycheck, that might be a viable option. However, taking out a personal loan involves many risks and you should only do so as a last resort.
Payday loans have fixed interest rates, which means the rate you pay doesn’t change for the life of the loan. They are designed to be short-term loans that help people cover necessary expenses between paychecks or emergency expenses. Payday loans are generally for smaller amounts, $500 or less on average. However, they come with exorbitant interest rates. The average two-week payday loan comes with an APR of almost 400%. By comparison, the average APR for a regular personal loan is just over 10%.
The dangers of payday loans
Payday loans can attract borrowers with bad credit because most payday lenders don’t do credit checks. However, taking out a payday loan can further damage your credit and throw you into a cycle of debt that can be difficult to escape. It is extremely common for payday loan borrowers to have difficulty repaying the loan at the end of the loan term of two to four weeks, forcing them to take out an additional loan to meet the payment deadline.
Nearly 1 in 4 payday loan borrowers take out additional loans nine or more times after the first loan. Low-income communities are particularly vulnerable to payday lenders, and black and Latino communities are 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 cover your 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 it incurs interest.
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 valid option. Credit unions tend to have lower interest rates than traditional lenders, and many offer alternative payday loans (ALPs) that let you borrow $200 to $1,000 for one to six months. These loans have an APR ceiling of 28%.
Personal loans for bad borrowers
Online personal lenders tend to have fast approval and fund delivery times, and many online lenders are open to working with borrowers with bad credit. While borrowers with bad credit are likely to receive the highest interest rates from a lender, most personal loan borrowers cap their APRs at around 35%, which is still well below that of mortgage loans. salary.
If you want to take out a personal loan, you should compare the best lenders and prequalify with a few before making a decision. It’s also worth looking into small personal loans, especially if you don’t need to borrow a large amount of money.
Emergency rescue services
If you need help right away, federal and local programs are available to help. For example, the Emergency Rent Assistance Program is set up to help families cover rent and utility costs when needed. If food costs are a concern, it might be worth visiting your local food bank to ease the burden. It’s also worth checking to see if your local community has community service agencies that offer help with expenses like rent and back-to-school expenses for children.
Alternative ways to earn income
If you have items you are willing to part with and need money for necessities, it may be worth selling things like clothes and jewelry online or at a pawn shop to earn income. additional at a glance. If you have an extra bedroom in your home, you might consider renting it out through Airbnb or finding a roommate to reduce rent or mortgage costs.
At the end of the line
As inflation continues to soar, people are struggling to pay their bills and looking for ways to supplement their income. While payday loans are a quick and easy way to get food on the table or fill up on gas, they are incredibly dangerous.
A payday loan could put you in debt and ruin your credit. If you are having financial difficulty and are considering a payday loan, consider the alternatives listed above and see if they will work for you before making this decision.