But there is another exception to that rule, and that’s a credit builder loan

Obviously, you’ll need to make all of your debt payments on time from now on. You should also avoid incurring any new debt, since it will be difficult to repay.

Let me explain: these are loans that are designed specifically for people with either no credit or bad credit. They’re offered by some banks and credit unions and are well worth having.

A credit builder loan works by giving you a loan in which the proceeds are deposited into a savings account. The monthly payments are automatically drafted out of the savings account by the lender to pay the loan. Loans are for small amounts, have reasonable interest rates, with terms of anywhere from 12 to 24 months.

Let’s say that you take a credit builder loan for $500. The loan will be for 12 months at 10% interest. The loan proceeds will immediately be deposited into a dedicated savings account in your name (you will not have access to the funds in the account). Each month the bank will withdraw an amount sufficient to cover the principal and interest.

The bank will then report your good payment history to the credit bureaus. The idea is that building good credit will help to offset a history of bad credit. This will increase your credit score more quickly than simply paying off bad debt.

Best of all, you won’t have to be concerned with making the monthly payments. And as far as cost, you will only have to deposit enough money into the payday loans OH bank account to cover the interest for one year. At 10% interest, that will be something less than $50 for the year.

Overcome a lack of savings

The only way to eliminate the need for payday loans is to become self-funding. And the only way to do that is by having cash in the bank. You’ll be able to use savings when an emergency hits, rather than turning to high-priced lenders.

It will require sacrifice on your part and a commitment that the alternative to a payday loan is to be super disciplined about every penny you earn. My guess is that your budget is already tightly stretched, and therefore the only way to do it will be to increase income. You may have to take a second job or pick up some side hustles for as long as it takes to get enough money into your savings account to give you some budgetary breathing room.

You can also fast-forward the savings process by banking windfalls. Banking your income tax refund is an excellent strategy. But you could also consider selling off anything that you have but don’t need. For example, having a couple of garage sales or selling some stuff on Craigslist could easily raise a few hundred dollars.

You’ll also find that you’re going to have to continue refilling your savings account to prepare for future emergencies. But by then you’ll be in the savings habit, and it will be second nature.

Summary

Payday loans are designed to trap you in a cycle of debt. When an emergency hits and you have poor credit and no savings, it may seem like you have no other choice. But choosing a payday loan negatively affects your credit, any savings you could have had, and may even cause you to land you in court.

There are alternatives to payday loans – and good ones. If you need a payday loan, choose one of these other options because getting a loan for 300-500% interest over a few weeks is just never ever the way to go.

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