Payday Loan Alternatives: Which Option Is Best For You?

If you’re short on cash, the no-hassle payday loan promise of quick money can seem like an attractive option. But is it your only one?

The Center for Responsible Lending calls payday loans “predatory” — and with good reason. The ease with which borrowers obtain funds to carry to their next paycheck often takes a heavy financial toll. Several states now cap interest rates on payday loans at 36%. However, according to the CRL, APRs in states with no cap can be as high as 664%.

Payday loans are problematic because of their high interest rates, but extensions pose an even greater risk. If you can’t repay the loan by the due date, the Consumer Financial Protection Bureau warns that many states allow payday loans to be extended. In this case, you would only pay the fees owed on the loan while the maturity rolls over. You would then be charged a renewal or rollover fee plus any late fee, and you will still owe the original amount. This leads to a cycle of expensive debt.

The good news is that payday advances aren’t your only option when you’re in financial distress. Here are some alternatives to consider.

Create a payment plan

For example, if a looming credit card or other loan payment threatens your ability to pay for basic expenses, see if you can reach an agreement. Many card issuers offer hardship programs that allow you to temporarily reduce or suspend payments if you are unable to pay. Alternatively, your issuer could agree to lower your interest rate to make your payments more manageable.

If you’ve been a good customer in the past, your lender will be more likely to honor your request. Either way, it’s best to be open about your situation.

seek credit advice

If you can’t come to terms with your creditors, try working with a nonprofit organization credit advice Agency. A certified credit counselor can provide you with a debt management plan, in which the counselor will negotiate with your creditors to extend your repayment terms, lower your interest rates, and waive fees so that you owe less each month. You then make a one-off payment each month to the credit counseling organization, which pays your creditors on your behalf.

A credit counselor can also help you set a budget, give you tips and tools to keep your debt under control, and provide additional training and resources to get your finances on track. This way you don’t have to borrow money to cover your basic expenses. These services are often available for free or for a small fee.

Get a personal loan

While banks have a reputation for bureaucracy and slow processes, don’t skip your local financial institution if you’re in a bind. If you need money for a specific purpose, a personal loan from a bank or credit union could be a much cheaper alternative to a payday loan.

“These are more traditional lending arrangements that are structured so that you get an amount of money to set aside something that you need to buy or refinance, and you’ll have a repayment schedule,” says Andy Laino, a financial planner at Prudential.

But you are not limited to stationary institutions. With online lenders like SoFi and Earnest, you can see what interest rates and terms you qualify for without undergoing a rigorous credit check. Although these options don’t offer same-day funds like payday loans, some personal loan options can fund your bank account within days if approved.

They can also be a good option for borrowers with poor credit ratings. The lenders mentioned earlier, along with LendingClub, TD Bank, and others, are some of the best options for bad credit loans. Keep in mind that if you are approved for a bad credit personal loan, you will have to pay a much higher interest rate. However, it will still be a bit lower than what a payday loan costs.

“Personal loans are best used for debt consolidation, for people who have large medical expenses or know they will have some home repairs for a fixed price,” says Laino. “If you have more defined expenses or more defined projects, go for the personal loan.”

Tap on your home equity

Homeowners may be eligible for a low-interest, tax-deductible line of credit, says Howard Dvorkin, personal finance expert and chairman of financial education firm Debt.com. “For those on a steady income, this can be a great way to get cash fast,” he says. Average home equity interest rates are about 4%.

However, be extremely careful when using your home for a quick buck. “For those who are struggling financially, using home equity puts their homes at risk if they can’t pay off their debts,” says Dvorkin.

Get an alternative payday loan

Some federal credit unions Offer a special product known as an alternative payday loan or PAL. These are short-term loans designed to discourage borrowers from opting for high-interest payday loans.

The terms of these loans are standardized by the National Credit Union Association. PAL I loans are available in amounts ranging from $200 to $1,000 with terms ranging from one to six months. According to MyCreditUnion.gov, the issuing credit union may charge an application fee of up to $20. You must have been a member of the credit union for at least one month to take a PAL I. PAL II loans are more flexible—they allow you to borrow up to $2,000 with a term of 1 to 12 months, and are available once you join a credit union.

However, keep in mind that alternative payday loans can still carry fairly high interest rates. Fortunately, PAL interest rates are capped at 28% by law.

Get a credit card advance

Referring to a Credit card cash advance is never a cheap option, although it’s probably better than a payday loan. Most issuers charge a percentage of the advance as a fee, typically around 5%, with a minimum of $5 to $10. The average APR on cash advances is also around 25%.

The key is to pay off the advance immediately, before interest on the balance spirals out of control. Unlike purchases or balance transfers, credit card cash advances start accruing interest immediately. If you allow the balance to linger month after month, your short-term loan could turn into a long-term debt problem.

Get a salary advance from your employer

An advance on your paycheck could be the answer to your short-term liquidity problem. Not all companies offer this type of loan, and terms vary. It is important for you to understand that the advance is actually a real loan that you must repay according to the agreed schedule.

Use a Paycheck Advance app

If you don’t want to involve your business in your financial situation and you have a steady paycheck, you can use an app instead. Companies like Earnin and Brigit will give you a portion of your forthcoming paycheck with no interest. Fees are limited, although some apps allow you to tip voluntarily.

Borrowing from your 401(k)

It’s possible to access another workplace resource besides your paycheck: your 401(k). Although traditional advice would make you run for the hills before withdrawing any money from your retirement account, if you’re really stuck, a 401(k) loan is a great option.

Borrowing against your 401(k) doesn’t incur any taxes as long as you follow all the rules. This means that you pay back the loan on schedule or in full when you leave your employer. There is also no credit check required and you pay the interest back into your own account. As long as you pay off the loan within a year or so, the impact on your long-term profits should be minimal. Just remember that your employer may not allow you to make new contributions to your 401(k) while you are paying off a loan. That could slow your progress in building a nest egg for retirement.

Go to a pawn shop

Pawnshops offer secured loans without a credit check or lengthy application process. You can get instant cash by depositing an asset as collateral. Once you have repaid the loan and all fees by the agreed due date, your collateral will be returned to you. If you are unable to repay the loan on time, you will lose any assets that you have pledged.

Keep in mind that the cost of a pawn shop loan varies widely and is still higher than a traditional bank loan. Interest rates typically range from 5% to 25% per month (60% to 300% per year), depending on state law. Storage and insurance costs may also be included in the loan. The benefit is that if you can’t pay it back, you can walk away without incurring new fees or hurting your credit score.

Use a peer-to-peer lending platform

Peer-to-peer lending can also help you secure a quick buck by matching you with an investor through a lending platform like LendingClub or Prosper. Investors on these platforms can review the available loans and choose which one to fund. The investor charges interest for this. You may also have to pay a small lending fee.

P2P lending rates can be quite low, especially if you have good credit. At LendingClub, the range is between 7.04% and 35.89% APR. The application process is usually much less complicated than at a bank. P2P lending also offers other benefits. “A peer investor may be more sympathetic than a traditional bank,” says Dvorkin.

Ask family or friends

Finally, if delving deeper into debt due to fees and high interest rates is a real concern, you should reach out to a trusted family member or friend for financial help.

This option can be difficult to navigate, but could be a good choice if it allows you to avoid the sky-high interest rates and fees of a payday loan. However, remember that borrowing money from a friend turns a personal relationship into a business one. You have to be content with the fact that you owe this person, and the relationship could go sour if you don’t keep your end of the bargain. Your loved ones should only lend what they can afford to lose.

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