Payday Loan Alternatives: What Are Your Options?

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Even though payday loans usually come with high fees and interest rates, some people still turn to these loans when they need to borrow money. Unfortunately, payday loans often put your finances in an awful position. The fees and interest charged are even worse when you consider the usual short term of the loan, making the annual percentage rate (APR) on the loan sky-high.

Payday Loan Alternatives Worth Considering

Thankfully, there are many ways to borrow the money you need without taking out a payday loan. Here are a few alternatives you should strongly consider rather than taking out a payday loan.

Introductory 0% APR Credit Card Offers

While payday loans charge high interest rates, these offers could leave you paying no interest at all if you follow the rules. You could get an introductory 0% APR on purchases by signing up for a new credit card. These offers usually last from six to 18 months.

If you make the minimum payments on time each month and pay off your balance completely before the introductory offer expires, you shouldn't owe a penny in interest. However, if you can't pay off the balance in full before the introductory offer expires, you'll have to pay the regular interest rate for the credit card on any remaining balance.

Personal Loans

This payday loan alternative offers a more reasonable interest rate and a longer repayment term. Personal loans usually offer one- to seven-year repayment terms, but if there is no prepayment penalty or precomputed interest, then you should be able to repay the loan as fast as you'd like without a financial penalty. Personal loans are usually unsecured, so you don't risk foreclosure or repossession if you miss a payment.

The unsecured nature of these loans results in a higher interest rate than some secured loans. However, people with excellent credit can usually secure a personal loan with an interest rate in the 10% to 13% range—which is often lower than credit card interest rates and definitely lower than payday loan interest rates. On the other hand, you'll have debt longer if you don't pay down your personal loan early. You can find personal loans both locally at banks and credit unions as well as with many online lenders.

If you can't qualify for an unsecured personal loan, then a secured personal loan or small-dollar personal loan may be an option. Secured personal loans require you to put up collateral, such as a savings account or equity in your car, in order to take out a loan. Small-dollar personal loans, on the other hand, are usually unsecured loans for $3,000 or less and present less risk to lenders because the borrowed amount is smaller. You'll likely have to pay a higher interest rate with a small-dollar personal loan, but it should still be much lower than payday loan interest rates. You'll have the best chance of finding these loan options at credit unions, but online lenders and banks may also offer small-dollar and secured personal loans.

Loans From Friends or Family

Friends and family can offer a great alternative to payday loans, but they don't always turn out like you'd hope. The term, amount loaned and interest rate on loans offered by friends and family can be lenient or can be harsh depending on your particular situation. However, in most cases, you'll end up in a better financial position with a loan from a friend or family member than with a payday loan.

Family and friends usually don't mind helping out someone who's hit rough times once, but if you're a repeat borrower, then you could have a hard time getting a loan from a friend or family member. Additionally, if you don't repay the loan according to the agreed terms, then you risk damaging your relationship with the person lending the money, which may not make this type of loan worth it for your situation.

If you decide to borrow from friends or family, make sure to draw up a loan agreement stating the amount borrowed and repayment terms so everything is in writing should there be a disagreement during the repayment period about any part of the loan.

Financial Assistance Programs

Depending on why you're in a financial bind, you may qualify for a financial assistance program. Financial assistance programs can be offered by organizations both locally and nationally including governmental programs, religious organizations, nonprofits and community-based organizations.

While the assistance will vary based on the organization, you could qualify for free assistance with bills or food, low-interest-rate loans, or other types of financial assistance. Examples include Temporary Assistance for Needy Families (TANF) and the Low Income Home Energy Assistance Program (LIHEAP). Not everyone will qualify for every financial assistance program, as they each have their own requirements.

Credit Counseling

Even if you think you're financially tapped out, you may have other options you haven't considered. Working with a credit counselor could open your eyes to other alternatives that could free up the money you need. Credit counselors usually look at your income, expenses and your debt to get a view of your whole financial picture. After understanding your finances, they make recommendations based on your situation.

Recommendations can include debt management plans as well as bankruptcy if you're in a dire financial situation. Credit counselors may also be able to share their knowledge about assistance programs and other ways to trim your budget to find the money you need quickly.

Sell something

If you need cash immediately, consider selling something around your home that has value but you don't need. You can usually sell items quickly on Craigslist or Facebook Marketplace if you live in a decent-sized city and price your items well. While this can generate immediate cash, you could end up in a worse financial position if you sell an item you'll replace at a higher price than you sold it for later down the road.

Payday Loan Alternatives to Avoid

The options below are alternatives to payday loans, but you should do your best to avoid them because they're usually bad news for your finances.

Cash advances: You should aim to avoid this credit card feature even if you just need a bit of cash to get by for the next few days. Cash advances usually charge a cash advance fee such as $10 or 5% of the cash advance, whichever is greater. In addition to the fee, interest starts accruing from the day of the cash advance. To make things even worse, cash advance interest rates are often much higher than the interest rate charged on purchases.

Auto title loans: While a car title loan may seem like the perfect solution to get the cash you need, it can quickly turn into a nightmare. The lender could repossess your vehicle if you miss just one payment on your loan, even if it is worth several times what you owe. Once you add the risk of repossession to the high fees and interest rates you'll be charged, auto title loans quickly become a bad choice.

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