If you've never heard the phrase "alternative financial services," don't worry -- it's just another way to describe payday loans, cash advances, and other high-interest consumer lending products.
The relative value of these financial services is open to debate. Businesses offering high-interest loans claim that they are serving markets that would otherwise be ignored, thereby providing credit to people who normally don't have access. Many observers, however, feel these services are often predatory, trapping consumers in debt cycles that are often deeply difficult to escape.
Adhering to this latter view, twelve U.S. states have an outright ban on payday lending. Other states regulate the practice, with varying degrees of stringency. What is beyond debate, however, is the fact that subprime borrowing is always more expensive than conventional borrowing. This means that anyone who relies on alternative financial services such as payday lending or high-interest loans should attempt to break free as quickly as possible, and move into the traditional lending market.
That's often easier said then done. So in that spirit, let's examine the best way to move on from expensive alternative financial services.
Option One: Refinance Wherever Possible
Even if you're stuck with a subprime auto loan or mortgage rate, there's no reason to keep paying inflated interest without putting up a fight. If you have a four or five-year auto loan, that gives you plenty of time to work on improving your credit score and qualifying for a more attractive refinancing rate. If you think going from subprime to prime isn't worth it, think again. Cutting your interest rate in half can save you thousands of dollars over the course of a loan.
The same thing holds true for mortgages. Improve your credit score and contact your lender about loan refinancing. It also makes sense to explore home loan programs offered by agencies such as the FHA or VA to see if you qualify. If your current lender doesn't play ball, reach out to other lenders. Don't forget to request a Good Faith Estimate and a Truth in Lending disclosure when doing so.
Option Two: Seek Out Credit Counseling
Every state has non-profit credit counseling agencies that specialize in helping people get their debt under control. By partnering with an expert, you can leverage their experience and insight to help you escape debt traps caused by alternative financial services.
Working with an outside party can also help you clean up your own financial habits, something that will help you avoid falling back into these traps in the future.
Option Three: Consolidate Your Debts
If you can find an opportunity to consolidate your existing high-interest loans into a larger, lower interest loan, do so. This might require some work on your credit score and some shopping around, but it's a good, comprehensive solution when possible.
Option Four: Consider Your Legal Options
Sometimes your financial situation is so dire that it requires bankruptcy protection. This is a major decision, however, and not a move to be taken lightly. Given the repercussions involved, it's best to seek the advice of a professional before moving ahead.
The costs associated with alternative financial services can quickly spiral out of control, leaving borrowers mired in a high-interest debt trap. By considering the options outlined above, borrowers can eventually move on from subprime lending, improving their long-term financial prospects in the process.