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Alternatives to emergency and payday loans

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Payday and emergency loans are a fast and easy way to get cash if you’re in a financial bind and can’t get approved for funding elsewhere. Most lenders feature a simple online application process and will approve you for a loan even if your credit score is lower. Furthermore, funding times can be within hours or as soon as the next business day.

Still, you should explore alternatives for settling for one of these loan products. They generally come with hefty fees and short repayment periods, which can lead to added financial stress and credit damage if you cannot repay what you borrow on time.

Why avoid payday or emergency loans

A payday loan is a type of emergency loan that gets its name from the idea that you could write a post-dated check. The lender would front you the money and then cash your check (minus fees) on your upcoming payday date.

While payday loans are easy to access fast cash, they are costly. The average payday loan amount is $375, comes with a two-week term and includes $520 in fees, according to a recent Bankrate study. Furthermore, states without restrictions on the interest rates payday lenders can charge assess APRs as high as 521 percent. Consequently, payday loans should only be used as a last resort.

Below are some additional reasons why you should avoid payday loans.

High risk of default

Most payday lenders give borrowers approximately two weeks to pay the loan back. Unfortunately, the likelihood of repaying the entire balance by the due date is low, which means you’ll default on the agreement or incur an additional finance charge to roll the balance over.

Steep fees

The fees and interest rates on payday loans are sky-high. Plus, you’ll be hit with even more fees if you don’t repay a payday loan by the time you get your next check. Going this route can get you caught up in a vicious spending-and-borrowing cycle.

Potential credit damage

If you reach the maximum number of rollovers and still can’t repay the loan, your credit health could be at risk. The payday lender could report the delinquent balance to the three credit reporting agencies or sell your account to a collection agency. Either way, your credit score will likely drop by several points.

Alternatives to payday loans

Get help from nonprofits and charities

Some not-for-profit and charity organizations offer financial assistance to those in need. Beyond money, these organizations might also offer resources to help you get back on your feet, such as job training, educational workshops and mentorship.

Financial help from a nonprofit is essentially a no-strings-attached gift that you don’t have to pay back. And because it’s free money, competition for it can be steep. You’ll need to show that you qualify, and it may take some time for any money or assistance to arrive. Depending on the program, the funds may also be reserved for populations such as people who have disabilities or are sick, elderly or out of work.

  • Who it’s best for: Those who can meet an organization’s qualifications to receive assistance.
  • When the money arrives: It varies depending on the program and organization, but as there might be others ahead of you, there might be a backlog. In that case, it can take several weeks.

Reduce your medical bills

Sometimes all it takes to lower your medical bills is a phone call to the medical facility or hospital. Explain that you’re in a financial bind and unable to pay off your medical bills. They might be able to work with you and come up with a payment plan. If you’re put on a medical payment plan, you may be able to avoid being charged interest.

If you were denied a payment plan or are nervous about reaching out directly and negotiating for a reduced bill, consider working with a medical billing advocate. These professionals can look over your medical bills and explanation of benefits and check your bills for errors.

They can also try to negotiate for lower rates on your medical bills or dispute mistakes found in them. Medical billing advocates typically charge a percentage of the amount they saved you on your bills. Some nonprofits offer this type of advocacy free of charge.

Another way to reduce medical bills is to get a medical credit card. While it’s a form of revolving credit, like other credit cards, you’ll only be able to use a medical credit card to pay for health-related expenses.

The major draw of a medical credit card is that the interest is usually deferred. However, if you don’t pay your debt off within the given time, you’ll be on the hook for interest fees that have racked up since you made the charge on your card. It’s important to comb through the fine print, as every medical expense might not be covered.

  • Who it’s best for: Those who have a substantial amount of medical debt.
  • When the money arrives: It varies. To dispute a claim, it can take up to 30 days for review. If you’re waiting to hear back on relief options, stay on top of your minimum payments.

Negotiate a payment plan or extension

With so many folks being cash strapped from losing their jobs during the pandemic, lenders might be open to working with you on a payment plan or offering an extension on your debt. First, check the lender’s website to see if a relief program or hardship plan is available.

If you can’t find relief options on its site, you can still reach out to see if the lender will work with you on coming up with a feasible option. If you’re experiencing financial hardship, the credit card company or lender might help you to:

  • Come up with a repayment plan
  • Lower your monthly payment
  • Stretch out your repayment period
  • Temporarily pause your payments
  • Waive fees
  • Reduce your interest rate

While your lender may not offer this, it is still a good idea to check because you never know what resources your lender may offer.

  • Who it’s best for: Those who have a solid history of making on-time payments on their loans and credit cards
  • When the money arrives: While this isn’t a form of financing, it could help lower your monthly expenses. The time it takes a creditor to review your situation and implement changes can vary. Until changes go into effect, be sure to make minimum payments. Otherwise, your credit might suffer.

Get an advance on a paycheck

Your employer might give you the option of an advance loan. This is usually for a small amount, up to $1,000. This money will be taken out of your paycheck.

While you’ll have access to your money immediately, there are drawbacks to keep in mind. It could lead to poor financial habits, as you might need to keep tapping into future funds to pay for today. Further, as your employer is fronting you the money now from the next paycheck, you’ll have less money dropping in your bank account come next paycheck. In turn, you might need to continue getting an advance.

Another downside is that these employer paycheck advances often come on a debit card instead of cash or a bank deposit. While using a debit card can work for many expenses, it may not work for all your financial needs.

  • Who it’s best for: Those who are employed, need money right away and don’t have the best credit.
  • When the money arrives: It can arrive as quickly as the same day or the next day. Sometimes, you can get a small advance two days before your paycheck hits.

Get a personal loan

Personal loans can have several advantages. For one, they’re quite versatile in what you can use the money for, including buying groceries or paying bills if you’re in a financial pinch. Another draw of personal loans is that they’re unsecured, so you won’t have to offer collateral such as a house or car.

You can find personal loans through banks, online lenders or credit unions, which may offer lower rates for members.

If you’ve made missteps with your credit or have a short credit history, personal loans for people with bad credit are available. The credit requirements might be lower and more flexible, increasing your chances of getting approved. Note that these loans might have higher interest rates. Some personal loans come with origination fees ranging from 1 percent to 8 percent of the loan amount.

  • Who it’s best for: Those with strong credit and stable income.
  • When the money arrives: It depends on the lender. In some cases, you’ll receive funds the same day. With other lenders, it could take up to five business days.

Use a 0 percent APR credit card

If you have strong credit, you might be able to get approved for a 0 percent APR credit card. These credit cards feature an introductory period when no interest is charged. The intro period typically lasts from 12 to 20 months. Once the zero interest period ends, a standard interest rate kicks in.

You’ll want to pay off the balance on the card before the no-interest period ends, or you’ll be slammed with interest fees. See the interest rate and whether there’s an annual fee before applying for the card.

  • Who it’s best for: Those who have good credit and are confident they’ll pay off the balance before the introductory period ends.
  • When the money arrives: If you apply online, you might be able to get approved for a credit card instantly. However, it could take up to two weeks for the card to arrive in your mailbox.

Get a HELOC or home equity loan

If you are cash poor but house rich, you might want to get a home equity line of credit (HELOC) or home equity loan. Both let you tap into the equity that you’ve built in your home. If you cannot repay either one, your home might be at risk of foreclosure.

Just like a credit card, a HELOC is revolving credit that lets you spend up to a limit. A drawback of a HELOC is that rates are typically variable, making it hard to predict monthly payments.

A home equity loan is a lump sum you receive upfront. Like a HELOC, it’s secured by the equity in your home. You’ll be locked into an interest rate and given a certain amount of time to pay it back.

To qualify for a HELOC or home equity loan, you’ll need a stable income, a good credit score, a low debt-to-income ratio and at least 15 percent to 20 percent equity in your home. These loans also usually come with fees, so pay attention to the fine print.

  • Who it’s best for: Homeowners with stable income and not a lot of debt.
  • When the money arrives: It typically takes two to four weeks to close on a HELOC or home equity loan.

Borrow from your 401(k)

If your plan permits borrowing from your 401(k), you can generally use the money for whatever you please. You can borrow either $50,000 or half of what you have vested, whichever is less.

Like any other loan, you’ll need to sign an agreement that spells out the terms. You usually have five years to pay off your 401(k) loan. However, if you use it to buy a house that would be your primary residence, you might have up to 25 years to pay it back.

The interest you pay on a 401(k) loan can be comparable to what banks offer, but borrowing from your 401(k) means you’ll have less money in retirement. Plus, you’ll use after-tax dollars to make payments on the loan.

  • Who it’s best for: Those who aren’t retiring soon, have money in a 401(k) account to borrow and have a low credit score.
  • When to expect the money: It can vary, but expect the review process to take anywhere from five to seven business days. Once the loan is approved, you can expect payment within two to three business days.

Next steps

Depending on your needs and what you’re eligible for, you might be able to get the money you need with a payday loan alternative. If you’re interested in applying for one of these types of financing, here’s what to do:

  • Comparison shop. Look at different lenders’ rates and terms. You’ll also want to carefully review the fine print and fees. It’s important to understand what you’re getting into and be confident you’ll be able to pay it off.
  • Gather documents. Depending on the type of financing you’re going for, you might need to provide a photo ID and financial documents such as paycheck stubs, tax returns and bank statements.
  • Apply. When you apply for financing, the lender usually does a hard pull on your credit. This could ding your credit.

Identifying the best emergency loan alternative for your financial situation could take some time and legwork. However, it’s worth the effort as you’ll potentially save hundreds if not thousands of dollars and minimize the chances of digging yourself into a deeper financial hole.

You should also explore free options, like assistance from nonprofits and charities or payment plans from lenders and creditors, to get the relief you need. Either way, researching alternatives will equip you with the knowledge needed to make an informed financial decision.

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Written by
Jackie Lam
Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
Edited by
Loans Editor, Former Insurance Editor