Payday Loan Alternatives

For whatever reason, you need quick cash, and you need it now. It’s stressful, sure, but you should know there are a variety of ways to get you through a cash-flow jam that won’t cause lasting financial damage like payday loans can.

Some alternatives are short-term loans that, though they come with relatively high interest rates and fees, might make sense in an emergency. Some will get you the money you need faster than others, which could be important in a crunch. And some could deliver the help and guidance you need simply through the kindness of friends, family, or even strangers.

Whatever your situation, it’s smart to know what your options are, because here’s what you don’t need: You don’t need to keep needing quick cash, month after month after month.

That’s what can happen if you fall prey to a sweet-sounding offer of a loan that promises to tide you over until your next payday. Walk away, if you can. Taking out a payday loan like that could haunt you for months to come.

Why You Should Avoid Payday Loans

Payday loans are risky. They’re expensive. They’re intended to keep you on the hook for as long as possible. And they prey on the most vulnerable, desperate borrowers among us.

How’s that for a start on why you should avoid taking out a payday loan?

You can find some payday loans online, but most payday lenders operate in person out of storefronts in or near low-income neighborhoods, military bases, and communities of color. Payday lenders target borrowers with bad credit, little savings and don’t have ready access to more conventional loans, but are in dire need of money to pay for food or rent or a medical emergency or any overdue bill.

Payday lenders don’t ask for a credit check or collateral, and their application process is quick and simple. They make it sound so easy.

But a payday loan comes with an astronomical average annual percentage rate (APR) of 399%, and that number can be even higher in some states. By comparison, the average APR on credit cards in 2023 is around 24%. (The APR is the cost you pay each year to borrow money, including fees, expressed as a percentage.) So, if you take out a payday loan for $375, which is roughly the average amount in this kind of loan, you’ll pay in the neighborhood of $520 for it after interest and fees are added. And since the due date on squaring your loan with the lender comes up as soon as you get your next paycheck, you’ll only have about two weeks or less to make good on it.

That’s ugly enough, but it gets even uglier. When you can’t pay it back as soon as it’s due, your payday lender will be happy to extend the deadline another couple of weeks for you … at an even greater cost. You’ll be charged another fee while you still owe the balance on the original loan. Every time you get another extension, another fee is added. You’ll continue to need quick cash just to pay for the quick cash you took at the start, but now you’ll need even more of it. The process puts you into a downward spiral of debt from which there might be no escape. You’ve taken out a loan you can’t afford, which is why payday loans are considered predatory lending.

If it’s too late and you already have payday loan debt, look into some payday loan consolidation options. Using another type of credit to pay off your payday loans can help get you out of the payday loan cycle.

So, again, walk away if you can. Don’t listen to that smooth-talking payday lender. You have other options, as you’ll see below.

Alternatives to Payday Loans

You want a better, fairer deal than a payday lender will give you. You want a short-term loan you can manage, one that will do the least amount of damage to your already-shaky finances. You want an interest rate and fees that won’t bedevil you for weeks and months into the future. You want access to some quick money in a way that will actually help you rather than hurt. Maybe you just want some expert advice on how best to get what you need.

It’s out there. Let’s take a look at some of the ways you can more safely get past a cash-flow crunch.

Nonprofits and Charities

Sometimes, it’s worth simply asking for help. Most communities have charities and not-for-profit organizations that extend free financial assistance to people in need. As long as you can show you qualify, a charity or nonprofit might provide the money you need to pay your rent, utilities or put food on the table. No strings attached. They also might be able to offer job training or other services that can steer you toward better financial circumstances. Check your local directory for organizations that administer financial relief to those in need.

Medical Debt Assistance

If a doctor’s bill is the source of the cash-flow crisis, many hospitals or other medical offices will work with you to get some medical debt relief. In some cases, they might be willing to forgive the interest on overdue payments, or they might agree to re-structure a payment plan into smaller monthly amounts. As with charities, this kind of help likely will require a reach-out from you. If that isn’t comfortable for you, try working with a medical billing advocate who will explore ways to save you money, or look into a medical credit card that includes an interest-free promotional period that could make a dent in the monthly payments for an expensive procedure or lengthy hospital stay.

Credit Counseling

It’s understandable if your head is spinning by the time you’ve finished sorting through the alternatives we’re suggesting here. How do you decide what to do? One way to get a sense for a solution that will work for you is to get in touch with a counselor at a nonprofit credit counseling agency. He or she will tailor their guidance to your unique financial situation and can help you develop a personalized plan to solve your money problems. Among other things, credit counseling might include suggestions for ways to knock down the interest you’re paying, get out from under your debt more quickly, or work with a budget to address future cash-flow issues.

Payday Alternative Loans

Wait. Payday alternative loans? Isn’t this entire article about alternatives to payday loans? Yes, it’s confusing, but there is a specific type of loan called a payday alternative loan (PAL) designed to help you avoid or recover from the damage a regular payday loan can do. It provides up to $2,000 either to keep you from taking out a payday loan in the first place, or to pay off a payday loan you’re already carrying. The maximum interest rate on a PAL is 28% (remember, the average rate on payday loans is about 400%), and you’ll have more time to pay back a PAL.

You can get a payday alternative loan from any credit union that is a member of the National Credit Union Administration.

Bad Credit Personal Loans

Both payday loans and bad credit personal loans are available even if your credit score is in the tank, and neither of them requires you to put up collateral. But the interest on a bad credit personal loan will be lower than the rate you’ll pay on a payday loan. Plus, you’ll have a year or longer to pay off a bad credit personal loan instead of the week or two required by a payday loan. The downside is that while it will be lower than a payday loan, a bad credit personal loan’s interest rate will be higher than you’ll pay on most conventional loans, so it could still be a burden. You can get loans with bad credit by applying for a personal loan at a bank, a credit union or online.

Family and Friends Loans

Who better to turn to in a time of need than family or friends? Someone who trusts you is likely to give you better terms on a loan than you’ll get from most institutions, and those terms certainly will be better than you’ll get from a payday lender. A short-term loan from a friend or family member might even come without any interest at all. If you find it awkward to ask someone close to you for financial help, make sure they know you’ll put the arrangement in writing, including the repayment plan, any collateral you’re willing to put up, and the interest you’ll pay (if any). And remember: You should pay any loan back regardless of where it comes from, but you most definitely want to make good on a loan from a family member or friend. You want to keep them on your side, after all.

Ask Your Creditor About Payment Plans

You might be surprised at how willing people are to work with you when you owe them money.

If you ask, your bank or mortgage company, your landlord, the utility company or anybody else to whom you’re in debt to might agree to an extension or a re-structuring of your payment plan. That gives you a little more time or elbow room to take care of your more immediate financial obligations. Many institutions have online forms that make it easy to request this kind of help, though in some cases (as with a landlord) you’ll likely have to screw up the courage to ask in person. Chances are they’d prefer to get something less from you now if the alternative is your inability to make any payment at all.

Low-Interest Credit Cards

Any interest rate is going to be better than the mammoth rates that come with payday loans, and that includes any interest rate attached to a credit card. Check out what’s available by way of an annual percentage rate (APR) with cards on the market right now; the lower the better. If your immediate emergency is your credit card debt and you can qualify, look into a balance transfer card. It will usually come with an 12-18 month introductory period that features 0% interest, and you can move what you owe on your other cards on to it. That should free up some money for you to address the current crisis. Two caveats: 1. The interest rate on a balance transfer card will go way up after the introductory period ends; and 2. You’ll need a decent credit score to qualify for a balance transfer card or other low-interest card.

Peer-to-Peer Loans

You’ll pay some fees to get matched with a lender for a peer-to-peer loan, but the interest rates on this sort of transaction are much more reasonable than you’ll get from a payday lender. In most cases, the rate will be lower than 36% and could be as low as 8%. Peer-to-peer lending works through online platforms such as Prosper, Funding Circle and LendingClub that put a borrower (you) together with an investor who will loan you what you need. The loan is unsecured, meaning you don’t need to put up collateral. A poor credit score or less-than-extensive credit history might not keep you from being approved, though those shortcomings likely will affect the terms you get. In some cases, you can have the cash in hand within a day or two.

Lending Circles

If you’re willing to be both a borrower and a lender, then a lending circle might help you. It’s a small group of people (usually six to 12) who help one another out with loans that come with little, or no interest attached. Each person in the group periodically (usually once a month) puts in a certain amount of money, and the total is given to a different member of the circle every month. The membership sometimes consists of people who were already familiar with each other, but there are organizations such as Mission Asset Fund that provide directories to more formal lending circles around the country. Note that a lending circle might not be the quickest way to get the cash you need, as the payouts go to only one person at a time. If you can’t convince the membership that your situation is dire enough to put you at the front of the line, you’ll have to wait your turn.

Consider a Side Hustle

With a little initiative, it might be possible for you to earn the cash you need on your own. Sell some of your stuff at a garage sale or on the web. Look for online surveys that pay for responses. Check out freelance opportunities for skills you already have. Take a part-time job. Drive for Uber or Lyft or DoorDash. It doesn’t have to be forever if you don’t like it, but the money you make from a side gig could get you past a short-term financial pickle.

Cash Advance

A cash advance is another name for a short-term loan that puts money in your pocket in a hurry. In that sense, a payday loan is a cash advance, and we’ve already told you why that particular kind of cash advance is a must to avoid. But there are a couple of other ways to get a cash advance, and though we should note that they involve high interest rates and heavy fees, they’re nonetheless more palatable than the dreaded payday loan.

The most common is a credit card cash advance, which allows you to borrow on your line of credit. You can use your card to get the quick and easy currency you need from a bank or an ATM, and that can come in handy when, for whatever reason, you can’t use the credit card itself to pay for something right now.

Here’s what isn’t so handy: It might feel like a normal transaction, but a credit card cash advance will cost you more than a conventional use of your card does when you make a purchase or pay a bill. Banks put cash advances into a different category that includes higher fees and interest rates, so it makes very little financial sense to get a credit card cash advance to pay off, say, the credit card you just abused to get the advance.

There are also apps that can get you a cash advance when you need emergency funds. They’ll work for you when you can prove you have a steady income; the app will want to confirm that before it coughs up the dough. If you qualify, a cash advance app generally will allow you to borrow an amount up to $500 from your next paycheck. Apps aren’t nearly as expensive as payday loans, but they aren’t cheap, either. And they sometimes have the audacity to ask you for a tip for the privilege of using them.

» Learn More: Payday Advance Apps

Bottom line: A cash advance could help you through an emergency, but it’s only a good idea if it’s used sparingly. Or, of course, if your alternative is a payday loan.

In the meantime, there are a couple of other ways to get a larger infusion of cash if you’re willing to risk assets you already have. Read on.

Home Equity Loans

The equity you have in your home is the difference between its market value and how much you still owe on your mortgage. Using that number, you can take out a home equity loan (sometimes called a second mortgage) for an upfront, and big, lump sum of cash that you’ll be expected to pay off in monthly installments. (Beware: Miss those payments, and you risk losing your home to foreclosure.) Your credit history, the value of your home and your income will determine the size of the loan for which you’re eligible. In most cases, the interest rate on this kind of loan is low because you’ve secured it with your equity, but you can expect to pay some closing costs and fees in the transaction. It usually takes from two weeks to a month to get the cash in a home equity loan, so if you need the money fast, this might not be the best alternative for you.

401(k) Loans

Assuming your retirement plan permits it, borrowing from your 401(k) will get cash to you faster than a home equity loan will. You’ll usually see it within a few days of finishing up the approval process. Like a home equity loan, a 401(k) loan can be for a large sum; it can be as much as $50,000. Because you’re borrowing money from your own retirement fund, you’re essentially loaning money to yourself, and you’ll be paying it back to yourself at a reasonably competitive interest rate. In most cases, you’ll have five years to pay it back. (Be aware that if you miss the deadline, the IRS will hit you with a hefty early withdrawal fee.) The biggest downside to a 401(k) loan? You’re cutting into the funds you’ve committed to your retirement.

Consult a Credit Counselor Before Applying for a New Loan

We’ve just outlined numerous options and included a boatload of information you should consider before you commit to any new loan, and especially before you commit to a new payday loan. It’s a lot to absorb. But you don’t have to make this critical decision by yourself. In fact, there are many benefits to exploring these alternatives further with a certified credit counselor from a nonprofit credit counseling agency before you make a move, starting with the fact that the guidance you receive that way won’t cost you a thing.

Counselors at nonprofit agencies are trained and certified in, among other areas, managing debt. If you’re already way down that rabbit hole, a phone call to a nonprofit agency can even provide credit counseling for payday loans you’ve previously taken out.

Your discussion with a credit counselor could steer you toward a personalized plan to address whatever your specific needs are, whether it’s creating a budget, getting copies of your credit report and scores, or choosing the best alternative to an immediate cash-flow crisis. Credit counseling typically is done over the phone, but it can be offered in person or online, too. The initial session is free and usually lasts about 40-45 minutes.

It’ll help.