If you find yourself in a tight financial spot, you might consider a payday loan. Before you pull the trigger, check out these 9 best alternatives to payday loans.
What is a Payday Loan?
A payday loan is a short-term loan, usually paid back in within a few weeks of borrowing. The amount borrowed is typically less than $1,000.
There are brick and mortar payday lenders and online lenders. Payday loans appeal to people who need relatively small amounts of cash quickly. Unlike getting a personal loan from a bank or credit union, the process to be approved for a payday loan often takes just a few minutes.
The loans also appeal to those with little or poor credit because lenders typically don’t run a credit check or use a credit score as a criterion to make the loan.
The lender verifies the borrower is employed, what their income is, and that they have a checking account. Once the loan is approved, the money is direct deposited into the borrower’s checking account. In exchange, the borrower gives the lender a postdated check for the loan amount plus interest.
On the date the loan is due, the postdated check will be cashed and the loan will be repaid. Some lenders require direct access to your bank account so they can deduct your payment.
Sound pretty good right? Fast, easy money. But payday loans are a terrible solution to being short of cash and can make an already bad situation even worse until it spirals completely out of control.
Payday Loan Statistics
Pew Trusts released a study on payday loan practices in 2016. The findings were disturbing. Twelve million Americans borrow from payday lenders each year and pay $9 billion on loan fees.
The average borrower is not using payday loans to cover an unexpected emergency expense like a car repair or medical expense, 70% are using them to cover regular expenses like rent or utilities.
The average APR on a payday loan is an astronomical 391%! Because the vast majority of borrowers are taking these loans to cover regular, expected expenses and not for one time emergencies, when the loan comes due, they are still short of money.
Three-quarters of payday loans are taken out by borrowers who take out at least eleven of these loans per year.
These statistics lay bare the problem with taking out a payday loan. Borrowers don’t make enough income to cover their regular expenses so they turn to these loans which have APRs in the triple digits and they take out another loan to pay the last creating a cycle that is almost impossible to break out of.
We certainly understand why people turn to them though. They are easy to get for those who feel like they have no alternative. But there are alternatives to payday loans that won’t leave you trapped in a further cycle of debt. Not all of them are ideal solutions but they are all better than payday loans.
If you are thinking about taking out a payday loan, try these solutions first.
1. Sell Something
Look around, you must own something of value that you’re willing to part with in order to get the money you need. Because people who need a payday loan usually only need a few hundred dollars, it’s not like you have to have an old Picasso around to raise the money you need.
And most of us have so much stuff we don’t need and rarely use, that chances are you can sell something you won’t even really miss all that much.
Because you need money fast, avoid sites like Amazon or eBay where it can take time you don’t have to be paid. Instead use a local site like Craig’s List, a local Facebook For Sale page, or Nextdoor. That way you can require cash payment and handle the transaction in person and quickly.
If you have any old tech gadgets laying around, you can sell them with Gazelle. If you go through the mail in process, it can take several days to get your money but if Gazelle has an ecoATM near you, you can have cash in hand immediately. I have more than two dozen near me so you should be able to find one close too.
Cardpool, a site where you can buy and sell gift cards has a similar program. You can go to one of their cashier-assisted locations or a kiosk location and sell your gift cards for cash immediately. I had twenty locations near me, all cashier-assisted.
You’ll never believe where every single one of them was. Inside a payday loan place!
2. Check Everywhere
When I decided to move to New Orleans, I started saving up quarters in a coffee can in case I moved into an apartment building that only had coin operated washers and dryers. I lucked out and found an apartment that had a washer and dryer right inside! My own washer and dryer! It was something I hadn’t had the luxury of since I left my parents’ house to go to college.
So I stuck my can of quarters on a shelf and would periodically empty the change from my wallet into it when it started making my purse too heavy. Recently the can was full to the brim so I decided to dump all that change into the Coinstar machine that sits inside the grocery store I shop in.
That can of change, not all of which was quarters, held $56! Check all of your purses, bags, pockets, couch cushions, and everywhere else some change might be hiding. You might not find enough to completely meet your need but it might be more money than you think and when you’re desperate, every dollar helps.
3. Side Hustle
You can make a few bucks answering surveys but it can take time to meet the threshold to cash out and longer still for some of them to pay out. Some of my favorites are the following:
When you need money fast, you have to find a side hustle that pays quickly. Again, you’ll want to turn to local, informal sites that don’t require an approval process. Your best bet is the “Gigs” section of your local Craig’s List. A few in my area included $15 an hour cash for painting interior walls of a business, $15 an hour for yard work, and people to work promotions at a football game, pay not listed.
I think by now we are all aware that there are scammers on Craig’s List so don’t allow your need for money to interfere with your common sense or gut instinct. If you think something is fishy, you’re probably correct so just walk away.
Nextdoor is another good place to look for local gigs like babysitting, pet sitting, and handyman type work. It’s a little more reliable than Craig’s List because the posts are not anonymous so while you could still find the occasional scammer, there are probably fewer.
4. Paycheck Advance
If you have a good relationship with your employer, you may be able to request an advance of your paycheck. In a small company, this agreement might be made with a handshake. In a larger company, there may be a protocol in place that you’ll be required to follow.
You may not wish your employer to know that you’re having financial difficulties and that’s certainly understandable. I’m sure we’ve all worked for the kind of boss who would take advantage of that type of vulnerability.
If you can’t get an advance on your paycheck or simply don’t want to ask for whatever reason, you may have an even better option.
Earnin is sort of a payday lender app. It works much the same a payday loan does but it doesn’t cost borrowers anything! No fees, no interest, nothing. Borrowers have the option to “tip” up to $14 per loan if they wish but it’s not required.
5. 401k Loan
Some people in personal finance circles will howl at the notion of borrowing against a 401k loan and while it’s not ideal, it’s certainly better than a payday loan.
If you choose to take a loan from your 410k, it should be for a small amount that you’ll be able to repay fast. The loan will have interest but you’re paying that interest back into the 401k, not to a payday lender. And there are no credit requirements to take a 401k loan.
So long as you pay back the loan within five years, you won’t face any early withdrawal penalties.
6. Peer-To-Peer Lenders
Peer-to-peer lenders like Lending Club, Lending Tree and Prosper offer loans the same way a bank does. The standards borrowers must meet are often less than those required by banks and the time it takes to receive the money is usually faster than it is from a bank.
The downside is that the interest rates on the loans are higher, especially for those with less than ideal credit scores.
But most sites allow you to see what terms you’re eligible for without doing a hard pull on your credit score so you can shop around without committing yourself. And while the rates are not terrific, they certainly aren’t triple digit either and you will have much longer to pay the loan back than payday lenders allow.
7. PayPal Working Capital
Is your financial emergency business related? If you have a small (or not so small!) business that uses PayPal to collect payments, you may be eligible for their Working Capital loans. PayPal charges a set fee for the loan, depending on how much you borrow. You can choose repayment terms of 10-30% of each transaction and it’s automatically deducted before the money hits your account.
There is no set repayment date but 5-10% of the loan must be repaid through the deductions every 90 days.
There is no credit check and the amount you can borrow will be determined by your past sales. The money is transferred to your PayPal account almost immediately.
8. Payday Alternative Loan
Some federal credit unions offer something called a payday loan alternative. They are easier to get approved for than a traditional personal loan from a credit union, credit scores are usually not a factor, and borrowers get the money quickly.
You do have to already have been a member of the credit union for one month before you’re able to apply for one of these loans. The interest rate is capped at 28% which isn’t great but not really a lot higher than some credit cards. The loans typically have to be paid back in one to six months, giving borrowers much more time than they get when borrowing from a standard payday lender.
You don’t have to wait around until you’re desperate to join a credit union. Credit unions can be a great alternative to standard banks for these payday loans and lots of other banking needs too including checking and savings accounts with better interest rates, auto, and mortgage loans.
Credit unions offer better and more personal customer service than banks as they are owned by their members. A credit union is set up to serve it’s owner-members, not stockholders always demanding higher and higher profits. Not everyone can join every credit union but there is a credit union for everyone.
9. Credit Card Cash Advance
We left this one for last because for most people, it’s probably the worst option on this list. You can take out cash at an ATM with your credit card just like you can with your debit card. This might sound like an ideal solution but a cash advance works differently than does a regular credit card transaction.
Taking a cash advance often incurs a fee, usually $10 or 5% of the amount you’re withdrawing, whichever is greater. Strike One. We all know that credit cards don’t have great interest rates, that’s what makes credit card debt so hard to climb out of. But a cash advance usually has a separate, often higher interest rate than would be charged for a standard, swiped transaction. Strike Two.
Credit cards usually offer a grace period, often it’s 21 days. So long as you pay the balance in full before the grace period ends, you won’t be charged any finance charges. If you’re in a jam, you might think this will work out okay, three weeks is plenty of time to get at least one paycheck and pay the cash advance back.
But cash advances do not have a grace period! Interest starts accruing the second you take the advance. Strike Three.
You can file into a pattern of never being able to pay off your credit card debt because of the interest the same way you can fall into the pattern of never being able to pay off payday loans without taking out another one.
Cobble It Together
We’ve listed these alternatives to payday loans in order of best to worst (in our opinion) options. Start at the top and do each one until you have the amount of money you need. Even if you have to exhaust the list, (and some won’t be options for everyone) by the time you get to the worse choices, you will need less money. Having to pay off $100 on a credit card cash advance is better than having to pay off a $500 advance.
There is another option which we deliberately omitted, borrowing from family and friends. It’s embarrassing to have to do it and it may lead to problems in the relationship. In that case, we think it’s better to use the other, less emotionally fraught options available to you. But you know your family and friends best. If you think you can go to them for a loan without causing tension, by all means, it might be the best choice for you.
Anyone can find themselves in a spot that makes a payday loan seem like the only option. But that should be a lesson you only need to learn once. You have to start spending less than you make.
Some of us spend without thought and can easily scale back once we start budgeting. Some of us have already cut things to the bone and have to find a way to make more money. And we all need an emergency fund of at least $1,000.
Some people rail against payday lenders, calling them predators who prey on poor and desperate people. We don’t disagree but if people only used these lenders once or once in a very great while, it wouldn’t be the end of the world. Yes, you’re paying an outrageous rate of interest but it’s on a fairly small amount of money and the loan is paid back within weeks.
You pay it, eat the interest and learn your lesson. But that isn’t what usually happens. People take out loan after loan and the hole gets deeper and deeper.
We all make mistakes but don’t keep making the same mistake again and again. Because a payday loan is not the answer.