It’s easy to see why payday loans are so tempting.
Consider this scenario, for example. You’re $300 short on an important bill. Your next payday is 10 days away, your credit card balance is at its limit, and you can’t borrow from any of your friends or family. What do you do?
The answer isn’t straightforward because there aren’t a lot of stellar options in such situations. In this scenario, you might be tempted to use a payday loan, which can bridge the gap in your finances, but it likely will plunge you further into debt.
If your situation seems desperate, you can explore alternatives to get the money you need. Understanding how payday loans work and determining your options will empower you to make a wise financial decision.
Here’s how payday loans work
When you get a payday loan, you use your paycheck as security against the amount you borrow. When you apply for a payday loan, it doesn’t matter if you have bad credit or no credit, because the lender has the authority to take its payment from your bank account when you get your next paycheck. That’s how payday lenders minimize their risk.
How can they do this? When you’re approved for a payday loan, you give the lender a postdated check that it can deposit on your next payday. If you take an online loan, you authorize the company to take the funds from your bank account once you’re paid by your employer.
What happens when it’s time to repay your loan
Usually, payday lenders charge you a fee for every $100 you borrow. The fee can range from $10 to $30, according to the Consumer Financial Protection Bureau, depending on the lender and where you live.
Those fees might not sound like a lot, but they can add up. An average $15 fee can equate to an APR of almost 400% for a two-week loan.
You’re expected to pay back the entire loan and fee on your next payday. Unlike with a personal loan, you often can’t make installment payments on a payday loan. If you don’t have the money to pay off the full amount on your next payday, you might have to roll the loan over to a future payday. Of course, you’ll accrue more fees in the process.
Imagine this scenario: You borrow $100 and owe $115 when the lender’s fee is added. Two weeks later when the loan is due, you realize you can’t pay. So you pay the $15 fee and roll the loan over — meaning you owe $115 again because you haven’t paid back any part of the principal and you have a new $15 fee.
That fee might look small when you first take out the loan, but if you keep repeating the rollover cycle you can end up owing more than the amount you borrowed in the first place.
What makes payday loans set off a dangerous cycle
It’s easy to minimize the effect of a payday loan fee when you’re desperate for money. It’s natural to assume you’ll be able to pay the fee plus the principal on your next payday.
However, your paycheck usually is needed to pay for other expenses. Even if you try to set aside money to repay the payday loan, unexpected costs can derail that goal.
Perhaps you planned to cut your gas budget the next month to pay back the loan. But if the cost of gas goes up, your plan could unravel. If you can’t repay the full loan amount, you’ll have to roll over your loan.
“You get in this vicious cycle if you don’t pay it back when it comes due,” said Katie Ross, and education and development manager at the nonprofit American Consumer Credit Counseling. “Then you’re going to continue to get interest and fees on top of that every time you’re late.”
It can be difficult to get out of this cycle once you’re in it. “Unless you have a plan to repay the loan quickly, it’s most likely only going to worsen your debt situation,” said Ross.
“The larger your paycheck, the more likely you are to be able to set aside funds to repay your payday loan,” she added. “But if your paycheck isn’t much more than what you’re borrowing, or if you have a number of other bills to pay, you can see where the trouble starts.”
What to do if you need money before your next payday
“We’re concerned that people don’t have money when they need it. Banks are loath to lend money to people they consider high risk,” said Sara Nelson-Pallmeyer, executive director of Exodus Lending, a nonprofit that lends money to help people get out of a payday loan cycle. “A lot of times, people get payday loans because they don’t have the ability to get a loan on better terms.”
You might not be able to get a traditional bank loan to meet your quick-cash needs, but some of these ways of stretching your finances to the next payday might work better instead of a payday loan.
1. Use a credit card
If you have a credit card that’s not maxed out, you could use it to charge your expenses. Not only will your interest rate likely be lower than on a payday loan, but you’ll have 30 days to pay back the credit card balance before it incurs interest. If you can pay back the money by your next payday, a credit card could be a cheaper option.
2. Apply for a personal loan online
It’s possible to get a personal loan with bad credit. Some online lenders, such as LendingClub and Earnest, have loans for as low as $1,000 to $2,000. Avant requires a minimum credit score of 600 with an estimated APR that ranges from 9.95% to 35.99% — significantly lower than the estimated 400% that you’d be facing on a payday loan.
You can check your rates online and it won’t impact your credit score. Once you’re approved, the money is sent to you within one business day.
3. Consider a credit union if you have time
Credit unions offer payday alternative loans (PALs) that allow you to borrow between $200 and $1,000 for a term of one to six months. The APR is capped at 28.00%.
But you have to be a member of a credit union for at least a month to be eligible to apply for PALs. So they won’t be the best solution if you need money immediately.
4. Generate income quickly
There are a few things you can do to generate extra income quickly. One way to make extra cash is by selling some of your stuff that you can live without. Have clothes you can get rid of? Try selling them online or at local secondhand stores.
You also can explore renting out a room on Airbnb, trading in your unused gift cards for cash, or cashing in any unused rewards points on your credit cards.
5. Ask your employer for an advance
Check with your employer if you can get an advance on your paycheck to tide you over. Ask your HR or payroll department if the company can find a way to help you out.
6. Seek leniency to reduce or delay payments
If you owe money on certain bills, it’s a good idea to call each creditor to request an extension on your balance due date until you have the money to pay it back.
Many companies will agree to this leniency or find ways to allow you to make partial payments on your bills. It’s worth checking areas where you can lower or hold off payments to get you through till payday.
7. Use emergency relief services to reduce your expenses
You might be able to save up for any upcoming payment by eliminating other expenses in your budget by using emergency aid services in your community. Here are some ways:
- Local food banks: Reduce or eliminate your grocery bill by accessing the resources of a food bank in your area while you wait for your next paycheck.
- Low Income Home Energy Assistance Program (LIHEAP): This is a program run by the federal government to help families meet their energy needs. The LIHEAP program also offers annual grants, which can’t provide emergency cash because you need to apply by September . However, you could use it to plan for the future.
- Local community service agency: Many communities have nonprofit organizations that help residents in times of need. For example, Community Services Agency in Mountain Park, California, offers help with rent, utilities, and back-to-school expenses. Some local churches or other religious institutions offer similar services.
8. What about pawn loans?
You could borrow money from a pawnshop by using one of your valuable items as security against your loan. The pawnbroker will hold the item and lend you an amount that typically is a portion of the resale value of the item, often for a high fee.
If you make payments on this loan, you’ll be able to redeem your item. If you stop making payments, the pawnbroker eventually will sell your item to recover its loss.
But a pawn loan is an expensive way to borrow money. When you average its fees over 12 months, the total equates to an APR of about 200% — or about half the cost of a payday loan.
Pawnbrokers don’t report your payment history to consumer credit agencies, so if you don’t pay off your loan it won’t impact your credit. But you’ll lose the pawned item.
The term length for a pawn loan is 30 days, which gives you some time to get the money together to pay it back.
However, it’s easy to get caught in a cycle of debt with a pawn loan, so it’s better to find other ways to make it through to the next payday.
How to evaluate other quick-cash alternatives
If you need cash now, here are a few ways to determine which method is right for you.
- Which loan will have the lowest interest? You might have an easier time repaying a loan if it has lower interest. In general, it might be possible to negotiate terms with lower interest rates on loans from family members and friends.
- Can you build your credit? It’s better to build your credit before you get a loan, but if that’s not possible, getting a loan from an institution that will help you simultaneously build your credit — such as a payday alternative loan from a credit union — could be a good way to get the money you need while also boosting your credit history.
- Can you repay the loan while meeting its terms? No matter the lender you use, you might be setting yourself up for trouble if you don’t have a plan to repay the loan while meeting its terms. A critical step in understanding which loan is right for you is finding one you can afford.
Turn to family and friends
Friends and family might not always able to lend money, but sometimes they can help in ways that can lessen your expenses. They can let you do your laundry at their place, which can save your costs at the laundromat. Or they can make dinner for you and give you leftovers that will last until payday. Or maybe they can lend you money.
Don’t be afraid to open up to people who are close to you about your financial struggles. It takes a village — and one day you’ll be there for them, too.