Alternatives to Payday Loans: Which Option is Best for You?

When you’re short on cash, the promise of a hassle-free quick cash payday loan may seem like an attractive option. But is it your only one?

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

Payday loans pose a problem because of their high interest rates, but renewals pose an even greater danger. If you are unable to repay the loan by its due date, the Consumer Financial Protection Bureau warns that many states allow payday loans to be renewed. In this case, you would only pay the fees due on the loan while the maturity date is extended. You will then be charged a renewal or rollover fee, as well as any late fees, and you will still owe the original amount. This is what leads to a costly cycle of indebtedness.

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

For example, if an impending credit card or other loan payment jeopardizes your ability to pay basic expenses, see if you can work out a deal. Many card issuers offer hardship programs that allow you to reduce or temporarily suspend payments if you are unable to pay. Alternatively, your issuer may agree to lower your interest rate to help manage your payments.

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

If you can’t get along with your creditors, try working with a nonprofit credit counseling agency. A certified credit counselor can set you up with a debt management plan, in which the counselor negotiates with your creditors to extend your repayment terms, lower your interest rates, and waive fees so you owe less on a monthly basis. You then make a one-time payment to the credit counseling agency each month, and they pay your creditors on your behalf.

A credit counselor can also help you set a budget, give you tips and tools to control your debt, and provide training and additional resources to get your finances on the right track. This way, you won’t need to borrow money to meet your basic expenses. These services are often free or available for a nominal fee.

Although banks have a reputation for being bureaucratic and slow, you shouldn’t pass up your local financial institution when you’re in trouble. 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.

“It’s more of a traditional borrowing arrangement, structured so that you get a sum of money to fund something you need to buy or refinance, and you’ll have a repayment schedule,” explains Andy Laino. , financial planner at Prudential.

But you are not limited to physical institutions. Online lenders like SoFi and Earnest let you see the rates and terms you qualify for without going through a rigorous credit check. While these options don’t offer same-day funds like payday loans, some personal loan options can fund your bank account within days if you’re approved.

They can also be a good option for borrowers with not so good credit. The lenders already mentioned, as well as 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 personal loan with bad credit, you will pay a much higher interest rate. However, it will still be a bit less than what a payday loan charges.

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

Homeowners may qualify for a low-interest, tax-deductible line of credit, says Howard Dvorkin, personal finance expert and president of financial education company Debt.com. “For those with a stable income, this can be a great way to access cash quickly,” he says. Average interest rates for home equity lines of credit are around 4%.

However, be extremely careful when leveraging your home for quick cash. “For those who are struggling financially, tapping into their home’s equity puts their home at risk if they can’t repay their debt,” Dvorkin said.

Some feds credit unions offer a special product known as an Alternative Payday Loan, or PAL. These are short-term loans designed to prevent 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 for amounts from $200 to $1,000, with terms of one to six months. The issuing credit union may charge an application fee of up to $20 only, according to MyCreditUnion.gov. You must be a member of the credit union for at least one month to take out a PAL I. PAL II loans are more flexible – they allow you to borrow up to $2,000, with a term of one to 12 months, and are available as soon as you become a member of a credit union.

Keep in mind, however, that alternative payday loans can still carry quite high interest rates. Fortunately, PAL interest rates are capped at 28% by law.

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

The key is to repay the advance immediately, before the interest on the balance gets out of control. Unlike purchases or balance transfers, interest begins to accrue immediately on credit card cash advances. If you let the balance linger month after month, your short-term loan could turn into a long-term debt problem.

A payday advance could be the answer to your short-term cash flow problem. Not all companies offer these types of loans and terms vary. It is essential that you understand that the advance is in fact a real loan that you must repay according to the agreed schedule.

If you don’t want to involve your company in your financial situation and you have a regular salary, you can go through an application instead. Companies such as Earnin and Brigit will pay you a portion of your next paycheck without any interest. Fees are limited, although some apps allow you to tip voluntarily.

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

Borrowing from your 401(k) is tax-free as long as you follow all the rules. This means repaying the loan on schedule or in full if you leave your employer. It also does not require a credit check and you repay the interest to your own account. As long as you repay the loan within about a year, the impact on your long-term earnings should be minimal. Remember that your employer may not allow you to make new contributions to your 401(k) while you are repaying a loan. This could slow your progress in growing a retirement nest egg.

Pawnbrokers offer secured loans with no credit checks or lengthy application process. You can receive cash on the spot by pledging an asset as collateral. Once you have repaid the loan and any fees by the agreed due date, you get your collateral back. If you cannot repay the loan on time, you lose any assets you have pledged.

Keep in mind that the cost of borrowing from a pawnbroker varies widely and is always higher than a traditional bank loan. Interest rates generally range from 5% to 25% per month (60% to 300% per year), depending on state law. There may also be storage and insurance costs included in the loan. The advantage is that if you can’t pay it back, you can walk away without incurring any new charges or damaging your credit.

Peer-to-peer lending can also help you get quick cash by connecting you with an investor through a lending platform like LendingClub or Prosper. Investors on these platforms can review the available loans and select the one they want to fund. In exchange, the investor charges interest. You may also have to pay a small loan origination fee.

Interest rates on P2P loans can be quite low, especially if you have good credit. At LendingClub, the range is 7.04% to 35.89% APR. The application process is generally much less complex than at a bank. P2P lending also offers other advantages. “A peer investor can be friendlier than a traditional bank,” says Dvorkin.

Finally, if sinking deeper into debt due to high fees and interest rates is a real concern, consider turning to a trusted family member or friend for financial assistance.

This option can be difficult to navigate, but could be a good choice if it allows you to avoid the exorbitant interest and fees of a payday loan. Keep in mind, however, that borrowing money from a friend turns a personal relationship into a professional relationship. You need to be comfortable with the fact that you owe this person, and the relationship could turn sour if you don’t keep your end of the bargain. Your loved ones should only lend what they can afford to lose.