Payday loans can be very appealing to those in a desperate situation, but they’re rarely the solution to anyone’s financial woes. There’s always an alternative to payday loans. But to determine which is the best for you, ask yourself three questions:
- What type of expense are you facing?
- What type of debt are you already in?
- What is your credit score?
Whatever your answer, we can suggest a payday alternative for you. Start by checking the table below to find your best path to financial health.
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 — recently the average credit card APR jumped to an all-time high of 16.32%. 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® Cash Back – 14 Month 0% Intro APR
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 2-5 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 6.16% 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.
State Payday Alternative Loans
Everything we’ve talked about thus far has served as a federal, or national, alternative to payday loans. But each state offers a number of unique payday alternatives, whether for specific expenses, such as energy assistance for the elderly or providing temporary mortgage assistance for the unemployed.
The following is only a small sampling of the many state-based alternatives that exist. Be sure to research any payday loan alternatives that exist in your state.
Developed as part of the U.S. federal government’s Hardest Hit Fund® in 2010, HomeSafe Georgia is a free federal assistance program designed to assist homeowners still suffering from the Great Recession.
At the time of writing, there are still two programs available: Underwater Georgia, and the Mortgage Payment Reduction program. Both programs offer up to $50,000 for homeowners, so long as they meet certain requirements.
If you’re a Georgia resident and you’re struggling with your mortgage, examine HomeSafe Georgia’s rules and regulations. If you’re eligible for assistance, apply soon — no Hardest Hit Fund® programs will accept applications beyond December 31, 2020.
Low Income Housing Energy Assistance Program (LIEAP)
LIHEAP is a federally funded program that helps low-income families cover electrical or utility costs.
Eligibility for LIHEAP varies from state to state. Unfortunately, only about 20% of those qualified for LIHEAP status receive benefits, and when funds run out for the year, no more benefits can be given out.
Be sure to research your local LIHEAP office, and apply as soon as possible to receive benefits.
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 misrepresenting 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.
Short-term vs. long-term loans
If you need money to meet emergency costs, you might think payday loans are the smarter option.
You don’t want to go into debt for years because you had to meet one cost. Long-term loans can be more expensive. Why not just take out a short-term loan and pay it all off at once?
Payday loans may not be expensive at first. But if you fail to repay your loan in full by the due date, your payments may skyrocket. You might find yourself trapped in a debt cycle.
Let’s use an example:
Chris makes $2,000 a month and pays an average of $1,500 in bills. His credit is considered “fair”. His car breaks down, and repairs are going to cost $1,000. Chris doesn’t have that much in savings, so he considers taking out a loan for $1,000.
Chris can either:
- Take out a payday loan for $1,000 at 300%, to be repaid in two weeks
- Take out a personal loan for $1,000 at 30%, to be repaid in two years (24 months)
|Loan||Total cost||Monthly payment|
Yes. Personal loans ultimately cost more. But it’s less than a $200 difference.
Again, payday loans charge $15 to $30 per $100 borrowed. We’ve assumed Chris’ payday lender only charges $15.
Payday loans must be repaid in full on the due date, or else borrowers may face steep rollover charges. These charges can mimic the loan’s origination fee.
Chris only makes $2,000 a month. Repaying his payday loan leaves him with under $950 to cover his bills. That’s a bad situation — and often how payday borrowers get caught in a debt trap.
His personal loan will cost more, but Chris can afford the monthly payments. In fact, he’ll have a little under $450 left over. That’s extra money he can either put toward his loan or into savings.
Are installment payday loans safer?
During your search, you may have seen advertisements for installment payday loans. The past few years have seen an increase in installment payday loans, instead of lump-sum payday loans. Installment payday lenders promise smaller monthly payments and a more flexible repayment schedule.
Though installment payday loans are more flexible, they are still just as risky as lump-sum payday loans. And like payday lenders, installment lenders often target those with less-than-perfect credit.
Lump-sum payday loans are often $100 or less, but installment payday loans sometimes cost over $1,000. It’s true that installment payday loans have lower APRs on average. While some installment loan APRs can go as low as 25%, many are still in the triple digits.
The interest appears lower at first glance, but installment payday loans also include monthly compounding in monthly fees. It’s the difference between stated and effective interest. The extra fees won’t be explicit when you first take out your loan, but it’ll be on your bill once you start making payments.
Like lump-sum payday loans, installment loans can be extended — for a fee, of course. The only difference is if you can’t pay, the fees are renewed every few months, as opposed to every few weeks.
While lump-sum payday loans are unsecured, installment payday loans usually require collateral. You may have to put up your vehicle or other expensive items as security for your loan.
If you see a short-term, high-dollar installment loan while shopping around, avoid it. Payday lenders are beginning to offer installment loans in response to political pressures currently placed on lump-sum payday loans.
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.
Payday loan alternatives to avoid
Chances are you found this page because you’re in need of emergency funding, but would still like to avoid the high APRs of a payday loan. This is a difficult time, and unfortunately, there’s a variety of predatory loans targeting desperate people.
In your research, you may have come across other emergency loans that can be just as potentially hazardous as payday lending, and should be avoided:
- Cash advances
- Auto title loan
Both loans may offer lower APRs and more flexible repayment terms than payday lenders. But both come with long term-consequences and high fees, and should only be considered as a last resort before payday lenders.
What is a cash advance?
We define cash advances as loans offered through your credit card. Many credit cards do allow cardholders to borrow cash up to a certain limit. But each cash advance comes with hefty fees, interest rates that could exceed 20%, and no grace period — you’ll begin paying off your loan the very next month.
If you have to take out a cash advance:
- Understand your credit card’s terms and conditions
- Use a card with $0 balance
- Do not make any purchases on the card until your loan is repaid
What is an auto title loan?
Auto title loans, also known as car title loans, are secured loans made using your vehicle as collateral. So if you default on your loan, your vehicle may be repossessed.
According to the FTC, auto title loans typically:
- Have a triple-digit APR
- Have a 15-30 day repayment period
- Can be 25% to 50% of the car’s value
Repayment of an auto title loan might not even have a positive effect on your credit score, and should be avoided at all costs.
What if I’ve fallen behind on my payday loan?
If you’re struggling to repay your payday loan, it might be tempting to ask your lender for an extension. While many payday lenders are willing to work with you, they might also charge “rollover” fees.
Rollover fees are charges incurred for extending the loan’s due date. Depending on the lender and the terms of the loan, they might be as costly as the fees charged when you initially took out the loan.
Know the rules on debt collection calls
If you’ve defaulted on a loan, creditors may sell your debt and information to third-party debt collectors. These organizations have been known to make aggressive or intimidating phone calls to debtors.
If the phone calls get to be too much, remember you still have rights.
The Fair Debt Collection Practices Act prohibits certain tactics including:
- Calling before 8 a.m., or after 9 p.m., unless the debtor has agreed to it
- Calling your home if you have submitted a written request that they stop
- Calling at your place of work if you have told them verbally or in writing that your employer prohibits such phone calls
- Using abusive or threatening language
- Threatening to seize or garnish your wages, unless a court specifically permits them to do so
- Misrepresenting the amount you owe
- Reporting false information about you to a credit reporting agency
If you have to take out a payday loan…
If you’ve exhausted every other option, and you have a short-term, necessary debt you absolutely must pay, then a payday loan may be your only option.
If that’s the case, here are a few steps you can take to protect your financial future and ensure you won’t be taken advantage of.
Never borrow more money than you need
Because the APR of payday loans is often much higher than that of others, you should only borrow exactly what you need to cover urgen expenses. The more money you borrow from a payday lender, the greater your exposure to high interest and fees.
Negotiate the longest possible payment period
Payday loans have such a high APR because they’re designed to be repaid within such a rapid period — anywhere from a week to a month. Unless you’re positive you’ll be able to repay the entire loan in a week’s time, try to negotiate for the longest payment period possible.
Otherwise, you may be charged a “renewal” or “rollover fee”, in order to extend your due date. And rollover fees do not contribute to the principal of your loan.
Ensure you have (or will have) the necessary funds
You should only take out a loan if it will result in a better financial situation for yourself and your loved ones. Rapid repayment and high APRs make payday loans some of the most difficult loans to repay, and if you miss a payment payday lenders can make life much harder.
Only consider a payday loan if you’re confident that you’ll have the necessary funds to repay both principal and interest by the time the loan comes due.
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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