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It doesn’t matter your financial situation: There’s almost always a better alternative to taking out a payday loan. So, if you’re facing an emergency and you need money fast, ask yourself three questions:
- What type of expense are you facing?
- What type of debt are you already in?
- What is your credit score?
Depending on your answers, we’ve found three of the best payday loan alternatives available today. Each offers quick funding to cover your debt, much lower interest rates than payday lenders, and can help get your finances back on track.
The Simple Dollar’s best payday loan alternatives:
|Reason for taking out a payday loan:||Alternative to payday loan:|
||We recommend credit cards instead. Our picks:|
||We recommend personal loans instead. Our picks:|
||We recommend Payday Alternative Loans (PAL) instead.|
Before we take an in-depth look at each, here’s a quick overview of payday loans and lenders.
What is a payday loan?
The Consumer Finance Protection Bureau (CFPB) defines payday loans as a “short-term, high-cost loan, generally for $500 or less, that is typically due within two weeks. Basically, payday loans are designed to float borrowers that are in between paychecks but need cash fast.
The average repayment date is anywhere from two weeks to a month — or whenever the borrower gets his or her next paycheck. It’s almost always agreed upon beforehand by both lender and borrower.
Payday loans are so attractive because so little is required in order to receive one. As long as you can provide an address, proof of employment, and maybe some references, you’ll be able to take out a loan.
Instead of using FICO or other credit scores to determine creditworthiness, many lenders often use custom scores based on information aspiring borrowers provide.
But, because payday lenders don’t use traditional creditworthiness methods, they don’t assign traditional APR. These are short-term, high-interest loans that are designed to be paid back within two weeks to a month.
Whether you have good or bad credit, payday loans charge a flat rate of anywhere from $15 to $30 per $100 borrowed. Even the best payday loans average around 400% APR per loan.
But in 2013, the CFPB found that the average payday borrower remained in debt for almost 200 days. That means a short-term crisis will likely turn into a long-term debt nightmare that you’ll struggle to pay off for months.
If you don’t have the money when the payment comes due, payday lenders are likely to:
- Send harassing phone calls and emails
- Hurt your credit score
- Add additional fees (on average $15 per $100 borrowed)
So if you take out $400 and you don’t have $460 to spare when payment comes due, you’ll owe even more money and receive threatening calls.
The best option for payday loans is to avoid them if at all possible.
Luckily, there are alternatives, even if you have bad credit. Here’s some options to explore based on your possible situations.
Using a 0% APR or balance transfer credit card
If you need money fast, but you’ve got average to excellent credit and a paycheck on the way, using a credit card to cover emergency costs is one possible alternative to payday loans.
It’s not an ideal choice — last year the Federal Reserve listed the average credit card APR at 12.24%. But when compared to the 400% APR on payday loans, credit cards are clearly the less painful choice.
While it typically takes a week to get a credit card in the mail, some companies — such as Discover — will ship you a card overnight (so long as you’re willing to pay the extra fees). Once you’re approved, you’ll have immediate access to your card.
If you want to apply for a new credit card, many offer an extended 0% APR period, perfectly suited for bigger purchases.
If you have existing credit card debt, however, consider using a balance transfer credit card, which offers a long window for cardholders to transfer and pay off outstanding debts.
Discover it® Cashback Match™ – 14 Month 0% Intro APR
If you know you’ll be able to pay off your credit card debt within 14 months, the Discover it® Cashback Match™ is a strong credit card alternative to payday loans. The introductory 0% APR period ensures that you won’t receive any interest on debt owed for the first 14 months of card ownership. (After that ongoing APR is 11.99% – 23.99% variable.)
As a bonus, you’ll be able to earn 1% cash back on all of your payments, and Discover will match your cash back dollar-for-dollar at the end of your first year of card ownership.
Discover it® – 18 Month Balance Transfer Offer
If you already have existing credit card debt and you’re in need of emergency funds, but you have average to good credit, consider the Discover it® 18 Month Balance Transfer Offer card. The card offers an extended, 18-month window for you to transfer and pay off existing debt. And cardholders even enjoy 0% intro APR period for their first six months on purchases.
(After both introductory periods end, ongoing APR is 11.99% – 23.99% variable.)
Both cards give access to Discover’s credit scorecard, where you’ll be able to monitor your credit score and credit history. It’s a great tool for repairing credit.
Note: Taking out cash advances on a credit card is also an ineffective alternative to payday loans. Cash advances tend to come with higher APR than purchases. Both of the above cards come with a 25.99% variable cash advance APR.
Applying for personal loans
If your credit score makes qualifying for a new credit card difficult, then a personal loan from either a bank, credit union, or peer-to-peer (P2P) lender will help cover emergency costs.
Personal loans differ from payday loans in two key ways:
- Loans are paid back in installments
- Loans are paid back over time
So, instead of paying back the entirety of the loan by your next paycheck, you’ll have the opportunity to make smaller payments over more time with a personal loan or payday alternative loan — which will help improve your credit score as you pay down your debt.
We recommend going to your local bank or credit union for a personal loan first, but only if you have good to average credit. A personal loan is only a good idea if you can get a decent APR. It becomes harder to get a loan from a traditional bank or credit union when you have average or bad credit. You may not qualify, or your APR may be too high to justify the loan.
P2P lenders (lenders that connect investors with borrowers directly) tend to offer more generous lending requirements than banks or credit unions, while still providing the security of paying in installments.
Each of our recommended P2P lenders come with an A+ rating from the Better Business Bureau, and offer fixed rates and payment plans.
If you’re considering a payday loan and you have bad credit, OneMain Financial may make the most sense for you.
OneMain Financial specializes in offering personal loans to those with bad credit. While there’s no minimum credit score, the beginning APR on personal loans is much higher than other P2P lenders.
If your credit’s a little on the rocky side, OneMain Financial offers both secured and unsecured loan options for borrowers. They also offer the most versatile loan term options, allowing borrowers to choose anywhere from 1-5 years to repay their loans.
OneMain Financial’s primary downside is its APR. They offer the highest APR of our recommended P2P lenders, which is likely to affect borrowers with the poorest credit. While a near 36% APR isn’t ideal, it’s still much better than a payday loan’s 400%.
LendingClub is the ideal choice for borrowers with decent credit who are in need of emergency funds but still have some wiggle room. (LendingClub can take up to a week to approve and fund a loan.)
They offer personal loans with solid APRs, starting at 5.99% for those with better-than-average credit.
If you have other outstanding loans, you may even be able to consolidate your debts into one loan with LendingClub’s Direct Pay. To qualify, borrowers must be able to use up to 80% of their loan to pay off outstanding debt.
With a minimum credit score of 640, Prosper is only a strong choice for borrowers with good to excellent credit.
Prosper does business a little differently than other P2P lenders. Instead of funding loans with their own money, Prosper attracts independent investors and underwrites them. Prosper utilizes an internal scoring system based on a borrower’s past behavior, and combining it with credit history to determine a unique creditworthy grade for borrowers.
If you need your loan funded quickly, Prosper’s got one of the shortest turnaround times out there — an average of 1-3 days.
And they have a strong mobile presence, a nice perk that often goes overlooked. Borrowers can check their loan details and their FICO score on the go.
What is a payday alternative loan?
A payday alternative loan (PAL) is the ideal payday loan alternative for anyone with existing debt and average to poor credit. If your credit history isn’t the greatest, but you still need emergency funding and don’t want to take a payday loan with bad credit, consider a PAL.
A payday alternative loan is a loan backed by the United States Federal Government, and is available through chartered National Credit Union Association (NCUA) members.
They are designed to help borrowers that are either caught or about to be caught in the debt trap of payday loans. Each loan offers the following features:
- Offers amounts between $200 and $1,00
- Loan terms from one to six months
- Processing fees up to $20
- Offer lower interest rates of up to 28%
In order to qualify for a PAL, borrowers must be members of the federal credit union for at least one month. In addition, the PAL must be repaid by the payment date, and cannot be rolled over. Lastly, borrowers may not take out more than three PALs within a six-month period.
Poor credit scores don’t affect a credit union’s willingness to grant a PAL. Instead, they’re more interested in consistent income and ability to repay.
PAL APR varies by credit union. You can find and contact your local credit union here.
Are payday loans legal in my state?
Financial organizations aren’t the only ones sounding the alarm about payday lenders — both the federal and state governments are trying to curb payday loans.
As of now, there are 14 states (as well as the District of Columbia) where payday lending is completely illegal — meaning that payday lending is still legal in 27 states.
But, even if payday loans are illegal in your state, lenders may attempt to reach you via online payday loan organizations.
What are online payday lenders?
An online payday lender is an organization that enables borrowers to take out payday loans entirely over the internet.
Online payday lenders are actually loan aggregators — third-party organizations that connect potential borrowers with a number of lenders.
In addition to their predatory lending practices, online payday lenders may sell your personal information (which can include name, address, social security, and more) to other organizations without your knowledge or permission.
Lenders may also require direct access to a borrower’s bank account before providing him or her with a quote. That means if you choose to prioritize an essential cost — rent, groceries, etc. — over a payday loan, the lender has the power to still take money out of your account.
The Federal Trade Commission has sued multiple online payday lenders in the past for lying about the cost of their loans.
But even if you live in a state where payday loans are illegal, you are still vulnerable to an online payday lender. Since online payday lenders have their headquarters in a state where payday loans are still legal, they can operate without legal ramifications.
If you should find yourself unable to pay back your debts, have a poor or bad credit score, and unable to pay an emergency cost without derailing your finances, it may be time to think about bankruptcy.
Bankruptcy has a bad reputation, but if you’re in a cycle of debt that you can’t get out of, it may be the most financially healthy decision you can make.
There’s no definitive time to know when it’s right to declare bankruptcy. The only sure sign is if you know that your current situation is going to harm your financial future or that of your children.
Simply put: Payday loans are predatory, and it’s all too easy to find yourself trapped in a debt cycle that can last for months or even years.
If you have the ability to avoid a payday loan, do so. Seek help from family or friends, use credit cards to your advantage, take out a personal loan, or apply for a payday alternative loan. Even declaring bankruptcy may be better than taking out a payday loan.
However, if all of these options fail you, be sure to shop around for the lowest interest rates and best terms you can find. Be wary of online payday loan lenders, and never borrow more than you can repay.
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