Desperate for Cash and Short on Credit: A Survival Guide for the “Subprime” Borrower

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The financial meltdown of 2007-2008 left a long trail of destruction in its wake, and nearly ten years later, millions of people are still trying to pick up the pieces. Faced with an urgent need for cash and having less than perfect credit, many have taken advantage of those short-term high-interest personal loans that are generally known as payday loans.

Payday loans aren’t universally available, but they have stirred up controversy in several countries, states, and provinces due to the predatory practices of some payday lenders. The problems have been addressed in various ways, resulting in a big cleanup of the industry in some places. Even so, some personal finance and consumer advocates say that the existing regulations don’t go far enough, while others are concerned about what will happen if payday lenders are squeezed out of the market entirely. Where will the “subprime borrowers” – people who need cash quickly, and can’t qualify for a bank loan or credit card – turn for help? And what can an individual with such a need do to avoid future cash crises, once the current crisis has passed?

Feasible alternatives to payday loans

In the earliest days of the payday loan industry, the practices of payday lenders were often viewed as being one small step above those employed by loan sharks. Though the industry has been forced to clean itself up considerably, that negative image still lingers somewhat in the minds of the public, and to a greater degree, in the minds of regulators. But despite the concerns that some critics have expressed, we would do well to recognize that if these high-interest loans were to be regulated out of existence, some would-be customers could find themselves turning once again to illegal lenders as their critical needs overwhelm their adherence to more prudent borrowing practices. Thankfully, there are legal alternatives to payday lenders that many borrowers can access, even if their credit is not very good.

One of those alternatives is a subprime credit card account, which typically offers an available balance that is greater than what can be borrowed with a payday loan, as well as greater flexibility in its repayment terms. Even at their high (36 percent) interest rates, these cards cost a fraction of what a payday lender charges. Customers are responding enthusiastically, and the number of new subprime card accounts as alternatives to the payday lenders has increased every year since 2009. It is estimated that 62 million people now have subprime credit card accounts.

A couple of other alternatives that are finding increasing favour with consumers are instalment loans offered by many traditional lenders and the “payday alternative loans” being offered by many credit unions. In both instances, the cost of the loan is significantly lower than a payday loan of the same amount, and repayment can be stretched out over a longer period of time. Borrowers with poor credit can often get approved for either of these alternatives, but unlike the payday loans and subprime credit cards, borrowers must have an active checking account in order to qualify.

In some areas, higher interest instalment loans have filled the void created by some of the payday lenders who have left the market. Though they have been flagged as yet another high-interest danger for consumers, they’re worth considering if you’re one of those consumers who have spotty credit and an immediate critical need for cash.

Only take on the debt you can afford

Despite their high interest rates, an instalment loan can be easier on your budget than a payday loan simply because you have more time to pay it off. Nevertheless, you must be careful to only take on the debt that you can afford. The good news is that most instalment loan providers will do an affordability check before approving you for a loan. And many of the best and most responsible lenders offer tools and advice that will help you manage your budget and calculate how well your income can cover all of your financial commitments.

However, it’s important to shop around, as all lenders are not alike. You may be able to get a lower interest rate from some than from others, but interest rate isn’t the only factor to consider. In addition to offering different interest rates, different lenders also vary in the size and length of loans they offer. And don’t overlook the value of customer service, either. Should you have any questions or unique circumstances that affect your ability to repay the loan as promised, a reputation for good customer service can be every bit as important as the more tangible aspects of the loan. You will need to look for comments and reviews by existing and previous customers, particularly those that don’t appear on the lender’s website or promotional efforts, in order to get a more accurate assessment of how the lender treats its customers.

But prudent borrowing is only one part of the equation for sound money management. You must also take a larger and longer view of your financial situation.

Set a goal to get – and stay – out of debt

It should be self-evident that it isn’t a good idea to rely on personal loans – instalment or otherwise – as a regular means of income. Chronic indebtedness is no way to live. But it’s easy to get in debt, and generally harder to get out of it. Although debt is sometimes unavoidable and isn’t always a bad thing, many people become overwhelmed with debt simply because they can’t control their spending. If that’s the case with you, you need to formulate a strategy for getting and staying out of debt. Here are a couple of things to help you get started on a way out of your credit hole.

Get rid of the shovels that dug the hole in the first place – Cut up of all but one of your credit cards, and keep it only for emergencies. And look for ways to eliminate unnecessary monthly expenses such as premium cable services and huge data caps on your cell phone accounts.

Pay off your highest interest accounts – Start with those cards you cut up, and if you have any high-interest loans (especially payday loans), do whatever you can to pay them off, even if that means consolidating the balances on a new, lower-interest rate loan.

Negotiate for better deals on existing accounts – Many lenders and service providers have some sort of customer retention program, though few advertise it. They will often lower your interest rate and/or extend your payments if they think you might take your business elsewhere.

Rein in discretionary spending – Even seemingly minor expenditures can add up significantly. Make a commitment to yourself to not make any impulse purchases. Start packing a lunch instead of getting fast food. And while you might enjoy the experience of patronizing your favorite barista several times a week, you can buy a pound of premium coffee for little more than the price of one latte pretensioso grande, and have delicious coffee for weeks.

As noted above, it is, by design, easier to get into debt than out of it. But with even a modest level of self-control, you can take steps to lift yourself out of a credit hole and avoid falling back into it in the future. Beyond the improvement in your finances, eliminating debt can have a miraculous effect on your stress level and overall quality of life.

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