Has a kinder and gentler payday loan option finally arrived?
With traditional payday loans, lenders are able to provide short term loans very quickly. They offset the high costs of these loans by having incredibly high APR of 400% or more. Because of this, borrowers often fall behind, only paying the interest and renewing the loan week after week.
There is hope for customers with low credit. A new batch of alternative payday lenders says they want to help customers to make payments on-time, build credit, and have access to less expensive loans in the future. Yes, they do make a profit, but it is a smaller one.
These alternative payday loans do have a lot in common with the traditional ones. They are widely available to consumers with bad credit or no credit at all. They give customers money quickly with the funds electronically deposited in as little as 15 minutes. The loans are for low amounts of money, usually $500 or less, and they are due back in a short amount of time, somewhere between two weeks and four months.
Different, Still Expensive
There are some critics of payday loans who believe these new payday lenders are no better for customers. After all, with APR rates of over 36%, who is really benefiting, the customers or the lender?
Lenders claim providing quick money to customers with subprime credit is unavoidably expensive. However, without these lenders, people would be pushed to more dangerous methods of getting money quickly.
Here are a few features that alternative payday lenders offer that traditional lenders do not:
Test of Affordability
With regular payday loans, lenders make it easy to just pay off the interest and roll the principal amount into a new loan on the next payday. Alternative payday loans are designed for the balance to shrink with every payment. These lenders use affordability tests to determine if a prospective client will be able to pay back the loan.
Flexible Repayment Schedules
Instead of the two-week repayment periods of traditional payday loans, many alternative lenders begin with a four month repayment period. If customers are unable to make a payment, these lenders are willing to work with customers to reschedule payments.
Lower Interest Rates are Promised
States regulate interest rates, which means they vary greatly around the country. Though their APR rates are still in the triple digits, alternative lenders can offer much lower rates than traditional payday lenders, 150% as opposed to 400%.
Borrowers of these alternative loans may find that if they continue to make on-time payments, they will have more options to lower those rates in the future. For subprime borrowers, this can make all the difference.
Having good credit history is incredibly important for affordable borrowing. To get a loan with a 36% APR or less, you will need to have a credit score of at least 600. Usually, people who use payday loans have bad or no credit history and cannot get a loan anywhere else.
Traditional payday lenders do not report on time payments to the major credit reporting bureaus. This is where alternative lenders stand out, as they do report to the bureaus, either automatically or optionally.
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High APRs are Still High APRs
Though the less intense repayment schedules and credit reporting are nice, these payday loans are still dangerous. If you are strapped for cash or looking to build up credit, there are many better options for you. This includes community assistance programs, paycheck advances, and more.
If you do need cash fast, choose a lender that does report on-time payments to the credit bureaus. If you need another loan after the first is paid off, look for a more mainstream lender that caters to lower credit to avoid those large APR percentages.