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 loan 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?
A payday loan is short-term loan, often for $1,000 or less, and it’s typically due within two weeks to a month. Basically, payday loans are designed to float borrowers that are in between paychecks but need cash fast.
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.
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. Of course, you’re thinking that if you pay off the loan within two to four weeks, you’re only paying 15% to 30% per loan. That’s true– if you pay the loan off and never darken their doorstep again, or not for months. The problem is, many people end up paying off the loan off within, say, two weeks — and then, because they’re broke all over again, take out another loan to help them get by.
In 2013, the Consumer Financial Protection Bureau 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, and if you’re late with payments, you can likely expect to see your credit score drop and the number of harassing phone calls and emails to increase.
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.
Alternative #1: Using a Credit Card Instead of a Payday Loan
If you need money fast, and 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.
True, if you’re reading this, you may not qualify for or have a credit card, or if you do, perhaps it’s already maxed out.
But if you are able to go that route instead, it’s worth considering, especially if you can find one with a 0% APR.
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, well-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 less than perfect credit, OneMain Financial may make the most sense for you.
OneMain Financial specializes in offering personal loans to those with less than perfect 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 less than perfect 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 as few as 3 days to approve and fund a loan.)
They offer personal loans with solid APRs, starting at 6.95% 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.
Disclaimer: All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 6.95% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. *The origination fee ranges from 1% to 6%; the average origination fee is 5.2% (as of 12/5/18 YTD).* There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
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.
Alternative #3: 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.
These loans 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:
- Loan amounts between $200 and $1,000
- Payback terms ranging from one to six months
- Processing fees up to $20
- 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. Which, true, does not help you if you aren’t yet a member and you need the money now. But it’s worth thinking about for the next time you need money.
Also good to know: 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.
The APRs on payday alternative loans vary by credit union. You can find and contact your local credit union here.
Common Questions About Payday Loans and Alternatives
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 this writing, there are 18 states (as well as the District of Columbia) where payday lending is illegal or structured in a way that high-cost loans aren’t allowed — meaning that high APR payday lending is still legal in 32 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.
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.
Should I consider bankruptcy as an alternative to payday loans?
That may sound crazy, but it really isn’t. Not if you’re constantly taking out payday loans, and you’ve been buried in debt for some time.
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.
Using a Cash Advance as a Payday Loan Alternative
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
Using an Auto Title Loan as a Payday Loan Alternative
Yes, it is an alternative. But don’t do it. In fact, arguably, if you are choosing between an auto title loan or a payday loan, take the payday loan. Still, it’s a little like choosing between being pushed off a cliff or run over by a car. Neither choice is going to be fun.
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- to 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.
How to Get a Payday Loan
Yes, we have just spent a lot of time telling you not to get a payday loan or payday advance, and now we are going to explain how to do it. But, look: If you need money, you need money. And, hey, it’s better than robbing a bank. Payday loans are also, as noted, probably smarter than an auto title loan. You may lose your shirt, but at least you won’t lose your car in the process.
So if you’ve exhausted every other alternative, and you have a short-term, necessary debt you absolutely must pay, then a payday loan may be your only option. If you’re going to take out a payday loan, here are some steps that may help.
Find out what documentation you’ll need: First, once you settle on a store (you can search online for payday lenders near your home — just remember to avoid online payday lenders), you’d do well to call ahead and tell the person you’re new to this, and ask what documentation you’ll need to bring.
If the customer service isn’t friendly, that may be a red flag — but mostly, we’re trying to save you time. You don’t want to wait in a long line and get to the counter and learn that you should have brought your electric bill, along with your driver’s license, as proof of where you live. Every lender is different, and it’s impossible to say what documentation you’ll need. But you’ll need to bring something to show that you are who you say you are.
Never borrow more money than you need: Secondly, once you get everything straightened out (and you’ll likely have to sign a million forms), you’ll be asked how much money you want to borrow. This is where you’re going to be very tempted to overshoot and ask for a bigger payday loan than you need. After all, in the midst of all this financial stress, somebody is going to hand you cash?
But the more money you borrow from a payday lender, the greater your exposure to astronomically high interest and fees, so you should only borrow exactly what you need to cover urgent expenses. Have this conversation with yourself before you go: Borrow too little, and you may feel like you need to borrow more money in a few days. But fall into the temptation of borrowing too much, and you’ll just be in more trouble when (or maybe it’s if) you pay this off.
Negotiate the longest possible payment period: Payday loans have such a high APR because they’re designed to be repaid in such a short period of time — 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” to extend your due date, which don’t even get applied to the balance of your loan.
But again, don’t take out a payday loan unless you absolutely have to – and remember that once you borrow the money, your troubles haven’t ended. If you don’t have an easy way to pay back the loan, your problems may have just begun.
The Bottom Line
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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