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In the COVID economy, is a payday loan ever the answer?

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Payday loans are short-term, high-cost loans that are used by millions of Americans every year — despite steep interest rates that can hit several hundred percent.

Sometimes called cash advances, short-term loans, deferred deposits or credit access, payday loans are available from both storefront lenders and online. People typically borrow $500 or less and must repay the balance within two to four weeks.

These loans are convenient and accessible to people with poor credit, but in return they are extremely costly. That’s why financial experts normally caution against using payday lenders.

But amid the layoffs and tough times stemming from the coronavirus crisis, payday loans may be a more tempting financial option. Here’s the full rundown on them, so you can make an informed decision.

How do payday loans work?

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Payday loans are quick and easy. You can get cash in as little as 15 minutes by applying in person at a storefront location or by the following day if you apply online. The lender will just need to confirm your ID, income and bank account information.

They’ll also require a post-dated check for the amount you’ve borrowed plus a bit more to pay for the service. The check will be dated to the day you get paid at work, normally within a two-week timeframe. Or you might have to provide the lender with authorization to directly withdraw money from your bank account.

The process is simple, but there’s no guarantee that applicants will be approved for the loan. You might be rejected if:

  • You don’t make enough money: Typically, lenders require at least $500 in monthly net income to be considered.
  • You’re active-duty military: Federal law states that the most you can charge military members is an annual percentage rate (APR) of 36%, so many payday lenders avoid them.
  • You have a recent bankruptcy.
  • You haven’t been employed for very long.
  • Your bank account was opened too recently.
  • You have recently bounced checks.

Because payday loans are geared toward people with poor credit, the application process doesn’t involve a credit check and your borrowing record usually isn’t reported to the national credit bureaus. That means taking out or repaying a payday loan probably won’t hurt or help your credit score.

The amount you can borrow on a payday loan is almost always less than $1,000. The exact limit depends on your state — some don’t even allow payday loans — and your financial situation. Where payday loans are permitted, the amount is usually limited to between $300 and $1,000. Your personal limit will be at the lender’s discretion.

What is the cost of a payday loan?

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To get a loan from a storefront lender, you can expect to pay $15 to $30 for every $100 you borrow, according to the Consumer Financial Protection Bureau (CFPB). A fee of $15 equates to an APR of almost 400% for a two-week loan.

And that’s on the low end. Borrowers in Texas, Utah, Nevada and Idaho pay more than 650% interest on a typical payday loan, according to the Center for Responsible Lending. Some online payday lenders charge even higher rates by claiming exemption from state rate caps.

By comparison, APRs on credit cards typically sit between 13% and 25%.

The astronomical interest rates are being charged to the people who can least afford it, making payday loans easy to get into but difficult to get out of. People who desperately need $500 now will probably find it difficult to repay $575 two weeks later.

In some states, people struggling with their payments are allowed to renew or roll over their loan into a new one, but that leads to higher and higher fees — creating a kind of debt spiral for people of limited means. The CFPB says 80% of payday loans get rolled over or reborrowed within 30 days.

If the loan isn’t repaid on time, the lender will try to withdraw money directly from your bank account. If you don’t have enough money in your account, each failed attempt may trigger additional bank fees for you.

But payday lenders won’t stop there. Be prepared for relentless calls (to you and your family) and letters from lawyers. They might even outsource your debt to an even more tenacious debt collector.

Why do people still take out payday loans?

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Even with such poor terms, payday loans remain popular: 12 million Americans use them every year (while spending $9 billion on fees).

People with bad credit and no savings are natural customers for payday lenders. According to a 2020 survey from the First National Bank of Omaha, nearly half of U.S. adults say they expect to be living paycheck-to-paycheck in 2020. And 53% say they don’t have an emergency fund that could cover three months of expenses.

That was before COVID-19 lockdowns led to some of the worst unemployment the U.S. has ever seen.

Low-wage workers can often manage daily expenses, but if an emergency hits — like a medical bill or car trouble — they need money fast.

Borrowers who’ve been thrown out of financial equilibrium and need instant access to cash often have bigger things to worry about than the loans’ high price tags. But payday loans rarely work out well for consumers — and there are plenty of options.

Alternatives to payday loans

Consumers with sufficient credit can turn to credit cards or, better yet, take out a personal loan.

Personal loan rates often start as low as 6% APR and can range up to 36%. In most cases, you’ll have two to five years to pay it back in monthly installments at a fixed, simple interest rate. Payments will be the same every month for the life of the loan.

You should exhaust every other opportunity before taking out a payday loan, including:

  • Borrowing from friends and family.
  • Asking your employer to advance your paycheck.
  • Selling things you don’t desperately need.
  • Taking up a side hustle to earn extra cash.

Build your credit and savings

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If you’ve ever used a payday loan, you’re likely trying hard to avoid them in the future.

The key is improving your credit score, which will allow you to access loans with better interest rates. The best way to do that is to pay down as much debt as possible and establish a record of prompt payment.

Borrowers who have already racked up debt from multiple sources will want to look into a consolidation loan. By taking out a single, low-interest personal loan, you can pay off all of your high-interest debt at once, saving you money and helping you free yourself much quicker.

If you have bad credit or no credit, you might need to start off by getting a secured credit card or a credit builder loan. These unusual products help people establish a history of responsible borrowing and raise their credit scores so they can get normal credit cards and loans.

Finally, you’ll want to get to work building your emergency fund so won’t have to borrow money in a pinch. Try to identify ways to cut your expenses and stash your excess money in a high-yield savings account, which will help your money grow while you aren’t using it.

Once your finances are back on solid ground, you can put payday loans behind you for good.

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‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic

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It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.

Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.

To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.

“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”

Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.

Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.

She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.

Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.

“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”

Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.

“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”

In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.

Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.

Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.

“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”

Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.

As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.

So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.

The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.

“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”

Related Content:

Owner of Worcester’s Nuestra restaurant, closing due to COVID impact, has something she’d like to say to Gov. Baker

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Columbus Mattress Wholesale moves to newer, larger Gahanna store

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More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable  price. 

Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.

They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches. 

But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of  helping low-income consumers secure mattresses and other bedtime products.  

“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.

Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income. 

Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.

Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.

Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.

Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.

Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus. 

Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell. 

She said a big mission for herself and Robbins, beyond doing business, is aiding the community.

“We’ve seen a lot of people struggle,” Clark said.

Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.

She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.

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@SarahEDon

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A Guide to Getting Mobile Deals with Bad Credit History

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You’re interested in a new mobile deal but there’s only one thing that’s stopping; you’ve got a bad credit history. Does that mean that your hopes of getting a new phone contract are crushed? Well, not exactly. In this article, you will learn how to get a mobile phone with no credit check required and how you can navigate the issue to get a great deal even with bad credit history.

Why is a bad credit history a big deal?

When taking a new phone contract, it means you’re entering into a financial agreement that requires you to make payments in monthly installments. As such, many providers of the service will want to ensure that they’re entering into an agreement with someone who will pay the agreed amount without violating the terms.

The best way for them to have that assurance is by looking into the credit history of the client. But does it necessarily mean that if you’ve got a bad credit history you can’t honor your side of the bargain in a phone contract? Of course not; which is why this article gives you the options you can pursue to end up landing a pretty impressive deal.

Although you might not find a deal that includes the latest devices in the market, you’ll not lack a relatively cheaper but functional option. For instance, if you’re a great fan of the iPhone, you might end up landing the iPhone XR instead of the latest release of iPhone 12. When the deal is cheaper, you stand higher chances of success as opposed to one that just dropped in the market and so it’s in high demand.

Another alternative is to find a contract that comes with a used handset as such tend to be less strict in terms of credit history requirements. That means you’re likely to pass the test of a contract with an already used gadget as opposed to that of a brand new phone.

Another alternative could be to go for SIM only deals especially if you already have an alternative source for a handset. Most of the providers won’t require you to sign any contract and so they’ll not look into your previous credit history. SIM only deals tend to be intensive on minutes, texts and data offers.

Networks that favor people with bad credit

There are networks that are more lenient to people with bad credit history than others. Major networks including Vodafone, O2 and EE usually come with strict requirements that might only frustrate you. The following are the alternatives you could consider looking into:

Smarty:The company offers SIM only plans that don’t require you to sign any contract. If you have an alternative handset, this could be a great alternative to consider as they won’t do a credit check on you. Their services and offers run on a monthly rolling basis which means you can walk away at any time in case you’re dissatisfied with the quality of service you’re getting. Their deals start at 2GB of data and unlimited texts and calls at a cost of £5 to unlimited calls, texts and data for £16.

Giffgaff:You won’t be subjected to a credit test here as well during sign up for one of the packages that the network offers. You’ll be required to sign up for a monthly bundle of your choice that’s inclusive of calls, data and texts. You can proceed with the same plan or switch to a new one after the month is gone. Most of their deals start at £8 a month.

VOXI:The network has numerous offers that operate on a 30-day rolling basis. They also won’t bother performing a credit check on you as it has no use in the first place. A bonus with this network is that they won’t include the social sites you frequent in their data charges.

Mobile phone to go with a SIM only deal

The SIM only deals we’ve highlighted above means that you’ll need to have a separate handset. In case you don’t have one already, you can take a separate mobile phone contract to go with your preferred SIM only deal. The other alternative is to buy one outright. But in case you don’t have money to make the purchase, you can always save up and buy when you’ve accumulated enough.

Some great smartphones that are classic and yet won’t put a huge wall in your pocket. Coveted brands such as iPhone and Samsung have great devices such as the Samsung Galaxy A52 5G that goes for £349 and the iPhone SE valued at £399. As you can see, with some savings, you should be able to get your hands on these gadgets and many others out there. And if you feel that these cost on the higher side, you can opt for refurbished phones. Refurbished phones refer to those handsets that have been used but have undergone intensive testing to ensure they still have got higher functionality.

When do credit checks apply?

Credit history is required by providers that have a mobile phone that requires a payment plan spanning several months or years. In most cases, the major network providers including EE, O2 and Vodafone will do a background check on your credit check before allowing you to sign up for their deals. Some factors that might make you have a poor credit rating is when you’ve missed several months’ payments, made late payments or placed too many credit applications concurrently.

Want to improve your credit rating?

The following are several steps you could consider to help you improve your credit rating. Most of these revolve around efficient management of your money, bills and other forms of payments.

  • Have a proper and functional bank account
  • Pay all your outgoing bills on or before the due dates
  • Ensure you’re registered on the electoral roll
  • Don’t share your account with a person with poor credit rating

That’s how you can work out things to get mobile deals even if your credit history isn’t a good one. But going forward, the best action plan would be to work towards improving your credit rating so that you can take advantage of the opportunities that come up in future.

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