Payday Loan Alternatives

With nearly 80% of Americans living paycheck to paycheck, it’s no stretch of the imagination to realize that a single emergency could put you in a major financial squeeze. You may consider turning to a payday loan in one of these situations, especially if you have bad credit or aren’t sure where else to turn. 

But before you assume that a payday loan is your best or only option, learn about other alternatives that could be better for your finances both today and in the long run. Not only could you potentially save money, but you could also avoid getting trapped in a debt cycle that offers few advantages and multiple disadvantages for you as the borrower.

Payday Loans Explained

When you don’t need to borrow a lot of money, a payday loan can provide you with a small amount of cash to cover a financial deficit for a short period of time. You can usually get a payday loan between $500 and $1,000, depending on the state in which you live. Repayment terms typically last just a couple of weeks, based on the idea that you just need a temporary bridge until your next paycheck. 

What’s the downside to taking out a payday loan?

The biggest negative is the amount of interest you’ll pay, which can be astronomical compared to other options available. Since the repayment term is so short, you usually pay a set fee for every $100 you borrow. On average, expect to pay between $15 and $30 for this amount. As an example, a $500 payday loan could cost you between $75 and $150.

If you can’t repay the loan on time, you’ll also be charged a rollover fee to extend the repayment period. You can see how it’s easy to quickly lose control of how much you owe. Another downside is that repaying a payday loan doesn’t help your credit score. While your score won’t be checked to get approved, you’re also not rewarded when you do make your payments on time. If you’re working to rebuild your credit, other options could be better to gain some extra benefits when taking on new debt.

Payday Loan Alternatives

Ready to explore your options beyond the world of payday loans? Consider one (or more) of these six alternatives.

1. Payment Plans

If you need an infusion of cash to repay a specific bill, first try working out a payment plan directly with the creditor or service provider. You could very well get an offer for an extended plan that works better for your budget. While this option may not be available with every single creditor, you may be surprised by the responses you receive.

Medical and dental providers, for example, frequently offer in-house repayment plans that don’t even include any financing charges. Utility companies may also be willing to work with you if you have to funnel your usual budget to emergency expenses. If you’re behind on loan payments, either for your car, house, or something else, you should always let your lender know about your situation as soon as possible. There may be ways they can help alleviate your financial burdens, such as through a deferment or refinancing the loan with either better rates or a longer repayment period. 

In many cases, these alternatives still provide you with better benefits than you would receive with a payday loan. 

2. Bad Credit Personal Loans

A payday loan isn’t the only financing option at your disposal, even if you have a below-average credit score. There are plenty of lenders out there willing to lend funds to bad credit borrowers. Yes, the interest rates will be higher than if you had good credit, but they are typically better than those you’d get from a payday loan.

You’ll also benefit from a longer repayment term, making your monthly payments more affordable so that you’re less likely to fall behind. Additionally, personal loans are generally reported to the credit bureaus so you can build a positive history and improve your score over time. 

There are a couple of places to find the most competitive bad credit personal loans for emergencies. The first is a local bank or credit union, especially if you have an existing relationship with them. For a truly fast and convenient financing process, however, consider an online lender. You can often receive your funding in just a day or two and it’s easy to confirm reputations with just a bit of background research. It’s also simple to compare offers by requesting pre-approval with multiple lenders. 

3. Credit Cards

Assuming you have a credit card that isn’t maxed out, you can use this financial resource in lieu of a payday loan. Many vendors accept credit cards today, even for things that historically wouldn’t be able to be charged. Some credit card issuers, for example, are beginning to let cardholders pay their mortgages. In an ideal world, it’s a great way to accumulate rewards points for a huge part of your monthly budget. In a worst-case scenario, it can help you keep current on your mortgage until you can get back on your feet. 

No matter what you end up charging, remember that credit cards don’t come with a set payoff timeline. That means your interest (and therefore, your balance) continues to grow as time goes on, even if you stop making purchases with the account. Compared to a payday loan, however, even a high-interest credit card will likely come with a more competitive rate. 

If you go into the situation with a set plan for how much you plan to charge and how you’re going to repay the balance, you’ll be much better positioned to meet your short-term needs without impacting your long-term financial health. 

4. Cash Advances

Another option surrounding credit cards is getting a cash advance. This can come in handy when you need to pay an expense that can’t be charged. A cash advance gives you money in hand and applies the amount to your credit card balance. You can expect a different fee structure compared to the rest of your credit card charges, but again, they won’t be as dramatic as payday loan fees.

The first cost to expect is a cash advance fee. Typically, the card issuer sets it around 5% of the advance amount, but that varies based on your individual user agreement. Check those terms before you take out a cash advance so you know exactly what to expect.

Another expense associated with a cash advance is that it usually has a higher APR than your normal credit card charges. The interest also accrues right away, rather than starting at the time of your next statement. As long as you’re aware of all the costs involved, though, a cash advance could be a strong option.

5. Employer Advances

When you really need funds because of an extenuating circumstance and are limited in your financing options, consider asking your employer for an advance on your paycheck. You may feel uncomfortable initiating the conversation, but if you have a good working relationship at your job with a fairly long tenure, you may be rewarded for your loyalty. 

Availability obviously depends on your employer. Small- to mid-sized businesses may have more flexibility in the rules, especially if you’re a devoted team member. Many start-ups are also beginning to offer apps that essentially let you withdraw your earned paycheck funds in real-time. If you haven’t brushed up on your company’s latest benefits recently, it may be time to review the employee handbook to see if there’s any way to get help. 

6. 401(k) Loans

Financial experts typically warn against withdrawing from your 401(k) before you reach retirement age. But when you’re considering a payday loan, you may actually benefit from this type of financing without causing too much damage to your retirement fund. Here’s how it works.

A 401(k) loan is actually like taking out a loan from yourself. Once you receive your lump sum payment, your repayments are taken directly out of your paycheck each month. This repays both the principal and interest, all of which goes back into your account. It’s actually a smart way to avoid paying expensive interest to other lenders. With a 401(k) loan, you get to be your own bank.

If you have a financial emergency, you can get funding quickly because there’s no credit check involved. You’ll also enjoy a low-interest rate, which is then returned to your account as you begin to make payments. The repayment term is set so you don’t have to worry about interest blowing your owed balance out of proportion. 

The Bottom Line

Even if a payday loan seems like the last option available during a financial crisis, it’s very likely that one or more of these alternatives could work in your situation. Start exploring as soon as you start to sense that you could use some monetary assistance. The more time you take to plan, the more flexibility you’ll have to avoid taking out payday loans once and for all.