Emergency and payday loan alternatives

Payday loans, often marketed as emergency loans, are a form of predatory lending that allow you to get the cash you need on the spot. While the idea of instant cash flow can seem enticing, especially if you’re tight on money, these loans can come with exorbitant interest rates that leave you trapped in a debt-cycle for years.

There are safer options to borrow the money you need. Before signing on the dotted line, research every option to avoid potential credit and financial damage.

Why it’s best to avoid payday loans

A payday loan is a type of emergency loan that gets its name from its repayment structure. Generally speaking, you’ll get the money up front and write the lender a postdated check. On your next payday, you’ll make a ‘balloon payment’ – the entire principal plus fees – or the lender will deposit the check and the money will come out of your account.

While payday loans are an easy way to access fast cash, they are also costly. In fact, most come with triple-digit interest rates that can sometimes exceed the 500-percent mark. This, combined with their short repayment period, is what makes these loans so risky.

Below are some additional reasons why payday loans should only be used as a last resort option.

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 due to the negative repayment history. Not only that, but, depending on how many days you’re delinquent, you could also face legal action, further stretching your financial situation.

Alternatives to payday loans

There are a wide variety of alternatives you should look into before taking out a payday loan. These alternatives are applicable to all borrowers, including those with less-than-stellar credit or those who need to reduce their overall monthly loan costs.

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 a chronic illness, older adults, or those who are currently unemployed.

• 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 without interest.

If you were denied a payment plan or are nervous about reaching out directly, consider working with a medical billing advocate. These professionals can look over your medical bills and explanations of benefits as well as check your bills for errors. They typically charge a percentage of the amount they saved you on your bills, although some nonprofits offer this type of advocacy free of charge.

Another way to reduce medical bills is to get a medical credit card. You will only be able to use a medical credit card to pay for health-related expenses. Interest is usually deferred, but you will eventually still have to pay it.

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

Negotiate a payment plan or extension

Your lender may offer a payment plan or an extension to make your debt payments more manageable. 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, reach out to see if the lender will work with you on coming up with a solution. If you’re experiencing financial hardship, the credit card company or lender might help you:

• 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 not every lender offers these benefits, it’s still a good idea to ask or you could be leaving free resources on the table.

• 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. And 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.

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.

Take out 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 most are 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 of repayment benefits for existing members.

If you’ve made missteps with your credit or have a short credit history, bad credit personal loans are available. The credit requirements are often lower  and more flexible, which does increase your chances of getting approved.

However, because the lender is taking more ‘risk’ by lending out to those with lower credit, these loans often come with much higher interest rates — sometimes up to 36 percent — and origination fees.

• Who it’s best for: Those with strong credit (or a co-signer) and a 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.

Apply for 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 – sometimes higher – interest rate kicks in.

You’ll want to pay off the balance on the card before the no-interest period ends, or you’ll diminish the overall value of the card and the offer.

• 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 cash advance from your credit card

Alternatively, if you already have a credit card and need to borrow hard cash, you can check if your issuer allows cash advances. However, credit card cash advances tend to come with higher fees and APRs than ordinary credit card purchases.

The average credit card purchase has an interest rate of nearly 21 percent. Plus, credit card issuers typically charge an extra fee between 3 percent and 5 percent on cash advances. So, if you take a cash advance of $700 from your credit card, you’ll likely incur a transaction fee between $21 and $35. You can also expect a higher APR on the cash advance.
Still, even with the higher interest rate, credit card cash advances are still a much cheaper and viable option than payday loans, especially since you have more wiggle room with the payoff date.

• Who it’s best for: Those who already have a credit card and only need to pay for a small emergency expense.
• When the money arrives: Instantly. Credit card cash advances function just like a regular atm withdrawal from your debit card.

Get a HELOC or home equity loan

If you have equity built up in your home, you may want to consider taking out 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. However, they can be risky forms of financing: if you cannot repay either one, your home might be at risk of foreclosure, as it’s set as collateral.

Just like a credit card, a HELOC is a revolving line of credit that lets you spend however much you want, when you want, up to a limit. A drawback of a HELOC is that rates are typically variable, which means that your interest rate is sensitive to the macroeconomic environment and will change based on market fluctuations.

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 in monthly installments.

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 that need to borrow a considerable amount of money.
• 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

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 falling victim to a debt cycle.

If you’re interested in applying for one of these types of financing, here’s what to do:

• Compare lenders and institutions. Look at different lenders, banks and credit unions to compare their rates, terms and fees. You should also consider any benefits or perks offered before making your decision to find the best option for your credit and overall financial situation.
• Gather documents. You will likely need to provide a photo ID, a Social Security number or Permanent Resident card and financial documents, such as paycheck stubs, tax returns and bank statements.
• Get prequalified. This step is needed if you’re going for a personal loan, a home equity loan or a HELOC. Prequalifying allows you to see what interest rates and terms you’re eligible for with a specific lender, without damaging your credit. Make sure you prequalify with at least three lenders to ensure you get the best loan for your needs.
• Apply. When you apply for financing, the lender usually does a hard pull on your credit. This could slightly lower your credit score, but with a good repayment history that number typically returns to normal, or improves, in a short amount of time.

You should also explore free options, like assistance from nonprofits and charities or payment plans from lenders and creditors. No matter which method is best for you, researching alternatives will equip you with the knowledge needed to make an informed financial decision.