Published in: Credit Cards | June 10, 2019

5 Alternatives to Payday Loans

Everyone knows payday loans are bad -- but where else can you get cash fast? Here are some ideas.

Young couple looking at bills in dismay.

Image source: Getty Images

When you need to borrow money right away, payday loans may seem like a viable solution -- especially if your credit isn’t perfect. After all, payday loans promise immediate access to funding and easy approval. When you’re facing a financial emergency, these are attractive features in a lender.

But there’s a big problem. Payday loans are extremely expensive. When factoring in the fees and you pay for a short-term loan, you end up paying an effective annual percentage rate (APR) of 400% or more with most payday loan lenders.

Because the interest and fees are so high on payday loans, many people who borrow become trapped in debt. If you can’t pay back the payday loan when it comes due in a few weeks, you’re forced to borrow again -- and pay the same huge fees for doing so. This is a financial disaster.

While you don’t want to get stuck with a payday loan when you need to borrow, there are times when securing funding quickly is essential. In these situations, it’s important you understand the alternatives to payday loans that are available to you. Here are five of your options.

1. Negotiate a payment plan to cover your bills

If you’re tempted to take out a payday loan because you have a big expense to pay -- such as rent, utility bills, or bills for medical care -- you should first try to see if you can work something out with the person you owe.

The person or company you have to pay may be willing to work out a payment plan with you that comes at a far lower cost than taking out a payday loan. This is especially true if you’ve generally paid on time but just hit a spot of bad luck.

While it may seem uncomfortable to ask your landlord or doctor if you can pay in installments, doing so is far better for you financially than taking out a payday loan at an extremely high interest rate to pay your bills.

2. Take out an online personal loan that promises fast funding

Getting a personal loan used to take a week or more by the time you submitted an application and received your funds. But thanks to the fact there are many online personal loan lenders, you now have options to secure funding quickly with many personal loans.

Some online lenders promise funds as soon as the next business day and are willing to make loans even if your credit score isn’t perfect.

While lenders that provide fast funding tend to have higher interest rates than those that take longer to fund -- you do pay for convenience -- the interest rates are still well below the average payday loan APR. Online personal loans also provide you with longer repayment timelines than payday loans, so it’s easier to fulfill your payment requirements and get your loan paid off on time.

Just make sure you find a legitimate online personal loan lender. Some payday lenders market their loans as “online installment loans,” without disclosing that what they’re actually doing is offering a very short-term loan at a very high rate. Pay attention to the APR, the timeline for repayment, and the company’s reputation before you borrow.

3. Get a payday alternative loan from a credit union

Credit unions have created payday alternative loan programs (PALs) that are specifically intended to save borrowers from having to take out payday loans.

Payday alternative loans are small-value loans usually for between $200 and $1,000. The fees for processing your loan application are capped by law at $20, and you’ll have between one and six months to repay the loans.

The costs and fees associated with these loans are much lower than for standard payday loans, and these loans are designed to help you rather than trap you in a cycle of debt you can’t pay back. You will need to become a credit union member in order to qualify for one if you aren’t a member already.

4. Use an existing credit card

If you have a credit card already, chances are good that the interest rate on your card is well below the APR on a payday loan. Using your credit card to cover your unexpected or emergency expenses is thus a much better idea than taking out a payday loan.

There are some expenses you cannot charge on a card, though. In these cases, you may want to look into services such as Plastiq, which lets you pay virtually any bill with a credit card. You’ll pay a 2.5% fee for using Plastiq, but this can still be a far cheaper approach than using a payday loan.

In a worst-case scenario when you need actual cash, you could also take a credit card cash advance. The interest rate on a credit card cash advance is going to be higher than the standard credit card interest rate in most cases, but should still be well below what payday lenders charge.

5. Borrow from family or friends

If you’ve exhausted your other options, borrowing from a friend or family member is worth trying before taking out a payday loan. Just be sure that you agree up front on the loan terms and have a clear plan for when and how the loan will be paid back.

Asking a friend or family member for a loan is uncomfortable, but chances are good that your loved ones won’t want to see you pay astronomical fees for a payday loan. If you don’t make a habit of asking for money all the time, your family and friends may be very willing to be generous when you need a hand -- especially if they know you’re serious about paying them back.

Always look for an alternative to payday loans

Because they're so expensive and can be so damaging to your long-term financial future, you should always exhaust all other options before you take out a payday loan. These should be loans of true last resort when you have a dire need for money right away and absolutely no other way to get it.

If you find yourself forced to take out a payday loan, make sure you do everything you possibly can to pay it back immediately and plan ahead so you don’t have to take out another one.

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