Published in: Personal Loans | Sept. 28, 2019

4 Alternatives to Consider Before Taking a Payday Loan

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It's surprisingly easy to land in a spot where a payday loan might seem like the only way out. Imagine you're halfway to payday when disaster strikes. Your car breaks down, your mother-in-law moves in, and your kid's baseball just broke your neighbor's car window. Then, for a moment, things look up. As you're flipping through a pile of past-due notices, a nondescript envelope catches your eye. You have been pre-approved for a payday loan of up to $1,500. It won't solve all of your problems, but it might get your car started and your neighbor speaking to you again.

Yet a payday loan is a dangerous proposition for the borrower. Many states prohibit or heavily regulate them due to their exorbitant fees and interest rates. Borrowers frequently end up repaying two or three times the amount they borrowed in the first place. In addition, your first several payments may only go toward interest; many months could go by before your principal goes down at all.

On top of all that, many payday lenders require access to your bank account so they can automatically extract payments. This could come at the expense of your other bills, putting you in a position where you need another loan to cover short-term expenses.

Payday loans are far from ideal. Fortunately, you may have other, much better options.

1. Cash apps

Cash apps like Earnin allow you to get paid as you work instead of waiting for the pay cycle to end. Eligibility requirements apply, and you will need to provide a fair amount of intimate information, but you won't be subject to the steep fees for which payday loans are infamous.

To use these cash apps, you must generally have direct deposit set up with your employer, as well as a regular pay schedule. Earnin’s website says it does not charge any fees and relies on tips from users to pay what they think is fair for the service. Earnin competitors often require membership fees that are generally in the range of $1 to $50 per month.  The loan limits for these earn-as-you-go apps normally range from $75 to $250, and there may be additional withdrawal caps per pay period. Accounts may also take a few days to activate with the first use.

2. Personal loans

Your eligibility for personal loans will be closely tied to your credit score. Poor credit doesn't necessarily mean you can’t get a loan, but it will likely impact the  repayment terms. If you qualify for an unsecured bank loan, you can also expect higher interest rates, as there's no collateral for the lender to recover in the event that you default on the loan.

Over the life of the loan, your repayment terms are likely to be much better than what you could get through a payday loan. Consider applying with a credit union if you're a member, as you're more likely to get a preferential interest rate.

Peer-to-peer lending platforms offer additional opportunities in the event of a cash shortfall. Longer loan terms on these platforms may also allow for more convenient repayment.

3. A family loan with Interest

You may not be keen on the idea of borrowing money from a family member, but documenting it like a traditional business deal might make both parties more comfortable. Even if you offered a family member an interest rate of 20%, it would still be a smoking deal for both of you. You avoid the triple-digit interest rate you might get with a payday loan, and your relative gets a return on investment they probably couldn't find elsewhere.

Start by drawing up a contract that states the total loan amount, interest rate, number of payments, and legal steps to be taken in the event of default. The contract should be signed by both parties and notarized. You can find a notary at your local bank or courthouse. Taking these precautionary steps helps to clarify the expectations for both parties. While it might seem like a lot to do, it’s a small price to pay when compared to the financial cost of a payday loan.

4. An employer advance

Find out if your company has a payroll advance policy. Even if your company doesn't have an official program in place, it may be worth asking.  If the option is available, it's likely to be one of the most affordable alternatives, as your employer probably won't look to profit from your exigent circumstances.

There may be times when none of these alternatives work for you. Maybe the options at your disposal aren't enough, and a payday loan may seem like the only way to cover the shortfall. If you're confident you'll be able to repay the loan in full when payday comes, you can minimize the financial damage. But if you aren't careful and disciplined, a payday loan could haunt you for years.

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