4 Alternatives to Short-Term Loans

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KEY POINTS

  • Unexpected financial emergencies are a routine part of life.
  • Payday lenders, title loan companies, and other predatory lenders routinely charge an APR of 400% or more, making it difficult to repay the loan.
  • Most alternatives to short-term loans will save you money.

When an emergency arises, the last thing you want to do is turn to a short-term lender.

One of the scariest things about being an adult is also one of the most exciting: It's impossible to know what's right around the corner. No matter how poorly things are going, they have a way of turning around. And no matter how well things are going, little problems are sure to get in the way on occasion. When trouble does arise, it can be made easier if there's money in your bank account. However, that's not always the case.

For example, let's say you're on your way to work one morning and your car breaks down on the highway. Your credit cards are maxed out, you don't have roadside service, and you don't feel as though you have any options other than a short-term or payday loan. Rather than settle for a loan from a predatory payday lender, consider these four alternatives:

1. Let friends and family know what you're up against

It may be difficult to let family and friends know what's going on with your finances, but a loan from someone who cares about you is the least expensive way to borrow money. Here are a few tips to help ensure that a personal loan from someone you know does not damage your relationship:

  • Borrow only as much as you need.
  • Provide the lender with a receipt for what you spent.
  • Create an IOU outlining how much you borrowed, how much you'll repay each month, and how long you have to repay the loan in full.
  • Pay the person back, no matter what else is going on in your life. There are few things worse than leaving someone you care about in the lurch.

2. Look into a payday alternative loan (PAL)

If you're a credit union member, check to see if your credit union is a member of the National Credit Union Administration. If so, you can apply for a PAL. The idea behind a PAL is to prevent credit union members from needing to borrow money from title loan companies, payday lenders, and others who are likely to charge an APR of 400% or more.

You can use a PAL to cover an emergency expense (like a car broken down on the side of the road) or to repay a payday loan if you've become caught up in one. PAL loans range from $200 to $1,000, and you have from one to six months to repay the loan in full. Your credit union may charge you an application fee of up to $20.

PAL loans have interest rates comparable to credit cards, but will certainly be lower than a payday lender's rates.

3. Apply for a loan or credit card with a cosigner

When you apply for a personal loan or credit card with a cosigner, the lender takes each of your credit histories into account. If the person cosigning for you has great credit, that makes the process easier. That's because the lender knows that if you fail to make payments on the account, they can go after the cosigner for the money.

Asking someone to cosign for you is a big deal, so make it a point to pay the loan off as quickly as possible. Never miss a payment or give the creditor any reason to contact your cosigner.

4. Apply for a secured personal loan

A secured personal loan works like this: You put something of value up as collateral. That can be anything from a refurbished car to valuable coins. Basically, it needs to be something that can be formally appraised as the lender will require an appraisal.

Even if your credit score has taken a beating, a lender is more likely to approve your loan because they know they're protected. If you fail to make payments as promised, the creditor has the right to take possession of the collateral, sell it, and recoup its loss.

You will likely find that the interest rate on a secured personal loan is lower than the average credit card APR.

One of the benefits of running into financial trouble is how much can be learned from the experience. Once you've repaid money borrowed, you have a chance to get started on an emergency savings account. Ideally, the next time a small financial emergency arises, you'll have the funds to cover it without worrying about where you'll find the money.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

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