by Ben Sweiry ·
Modified on 19 October, 2023
A payday loan is a good option for times when you need money fast to cover an emergency or essential living expense. However, although they can be very easy to set-up and take-out, a payday loan can quickly turn into a problem debt for many people.
Given this, you should carefully consider all options before settling on the one that you deem best suited to you. This guide will walk you through some of the alternative options to a payday loan.
Key Points
- While payday loans are convenient, they are expensive, with average interest on loans being 400%.
- You could consider a payday alternative loan, which are obtained through Credit Unions and a cheaper means of financing. If you have a poor credit score, you could seek a ‘Bad Credit’ loan, but these are also pricey.
- For a cheaper and flexible loan, approach a loved one, but be honest and open about how much you need, why you need it, and how and when you will repay your debt.
- You could ask your employer for support through asking for a cash advance, which is essentially an early paycheck.
- Other options include switching to a no-to-low interest rate credit card, seeking help from a credit counselor, or adjusting your budget yourself.
1. Consider A Payday Alternative Loan (PAL)
Credit unions that are members of the National Credit Union Administration offer Payday Alternative Loans (PALs). You could use money from a PAL to avoid a payday loan or to pay off an existing one. Lower-cost PALs give a borrower more time to pay off a loan than a payday loan does.
A credit union can charge an application fee of up to $20 for a PAL. PAL amounts can range from $200 to $1,000, with the payoff period lasting one to six months. As many as three PALs may be given to the same borrower during a six-month period, as long as no PAL overlaps or rolls over.
Commonly, credit unions offer PALs with APRs comparable to that of credit cards.
If you’re wondering what credit unions are, they are member-owned non-profit co-operative, whereby members can borrow money at low-interest rates. Credit unions aim to benefit their members rather than maximising profits.
2. Apply For a “Bad Credit” Loan
Instead of getting a payday loan, you may be able to apply for a bad credit loan. A number of lenders offer these loans for amounts that range from $500 to $10,000.
If the loan is unsecured (without any collateral), the interest rates are often very high to mitigate the potential risks of default – with rates around 500% to 600% APR.
But other options can be secured (with collateral) such as borrowing against your car, bike, van or home and essentially you give up the entire asset or a percentage of it to the lender if you are unable to repay. However, this means that you can borrow small or large loans, with bad credit, and the rates can be quite affordable, under 36% APR.
3. Borrow From Family Or Friends
If you’re in a financial bind, borrowing money from family and friends may be a great way to dodge a high-interest payday loan. In fact, you may even be able to borrow money with no interest.
Regardless of the interest rate you decide on, put your loan agreement in writing. This contract should include the amount of money you are borrowing, the interest being charged or the collateral being used, the payoff period, and the payment amounts and due dates.
Failure to repay a loan of this type won’t hurt your credit, but it can result in legal action and a severed friendship or strained family relationship.
4. Seek Help From A Credit Counselor
A nonprofit credit counseling agency may be the way to go if you feel like you’re swimming in debt.
A certified credit counselor can help you pay off your debt faster, lower your interest rates, work with you on a household budget and improve your financial situation. Depending on which services you utilize, nonprofit credit counseling agencies may provide their services at little to no cost.
5. Consider a Low-Interest Credit Card
Although your credit may be a bit wobbly right now, you might be able to get a low-interest credit card (or at least a card with an APR that’s considerably lower than the APR for a payday loan).
If you’re having a hard time paying back credit card debt, a balance transfer card can give you some breathing room. You’ll typically need good credit or better to qualify for a credit card with a low interest rate.
6. Look Into a Cash Advance From A Credit Card or Your Employer
A credit card cash advance typically charges a lower interest rate than a payday loan. Keep in mind, though, that the APR for a cash advance from a credit card may be higher than the APR for purchases made on the same credit card.
You’ll also be charged a fee for withdrawing a cash advance (3% or 5% of the amount borrowed is common). Beware of the potential to increase your credit utilization (which can hurt your credit) and accrue large fee and interest charges, however.
7. Ask Your Employer For Support
If you are employed, it may be worth speaking to your employer if you have encountered financial demands that you can’t quite meet. Many employers offer schemes to help out their employees, most notably in the form of pay advances.
A pay advance is given when your wage is granted to you early. This may be necessary if you are hit with a bill before your next pay day and need funds, and fast.
Before agreeing to a pay advance, though, you should make sure that you and your employer are on the same page and that you understand the terms of the advance. For instance, some employers only allow you to use a certain quantity of advances per year, so you should be aware if this is the case and only take it if you truly need it.
8. Adjust Your Budget
If you are consistently finding yourself strapped for cash, you should carefully look at how you are spending money and adjust it if you can.
To understand your spending, you could download a mobile application such as Mint or YNAB. These pocket-tools track and categorize your spending which allows you to spot if and where you’re splurging.
From this point, you can cut corners by eating out less, shopping at discount stores more and making little changes around the house such as monitoring your electricity use more. Through taking steps like these, you will notice your spending falling which will allow you to accumulate greater savings, thus making loans less necessary.