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 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. Research every option before signing the dotted line to avoid potential credit and financial damage.

Why it’s best to avoid payday loans

A payday loan is an emergency loan that gets its name from its repayment structure. With most payday loans, you’ll get the money upfront and write the lender a postdated check. On your next payday, you’ll make a ‘balloon payment’ – the entire loan amount plus interest and fees – or the lender will deposit the check, and the money will come out of your account.

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

This factor, among other reasons, is 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 repay the loan. Unfortunately, the likelihood of repaying the entire balance by the due date is low due to the extraordinarily high rates that most payday loans carry. 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. For example, the average personal loan rate, as of February 2023, comes out to 12.10 percent, while the average payday loan reaches three-digit interest rates. 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. This is why payday loans are so dangerous; the rates alone have the potential to 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. Also, depending on how many days you’re delinquent, you could also face legal action and may have to present in court.

Alternatives to payday loans

There are a wide variety of alternatives you should look into before taking out a payday loan. These alternatives apply to all borrowers, including those with less-than-stellar credit or who need to reduce their 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, some of these organizations might also have financial resources and training, like job training, educational workshops and mentorship opportunities.

Financial help from a nonprofit is essentially a no-strings-attached gift 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, which may take some time.

Depending on the program, the funds may also be reserved for populations such as people with disabilities or chronic illness, older adults, or those who are currently unemployed.

Reduce your medical bills

Sometimes, all it takes to lower your medical bills is a phone call to the medical facility or hospital’s finance department. While it’s not always guaranteed, some offer payment plans or hardship relief opportunities for those in a financial bind or who have experienced a sudden loss of income. In some cases, you may even be able to score an interest-free plan or partial debt forgiveness. However, it may take some time to hear back from the company or the financing department.

If you’re stuck in that waiting period, it’s imperative that you don’t fall behind and keep making your minimum payments by all means possible. Not making these payments will only put you in more debt due to interest and damage your score due to missed or late payments.

If you were denied a payment plan or need assistance negotiating your debt, consider working with a medical billing advocate. These professionals can review your medical bills, explain benefits and 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.

While it’s not reducing the amount you owe, using a credit card for medical expenses can help give you immediate payment relief. This isn’t recommended as a first-resort option, as interest can quickly accrue if you’re unable to make the monthly payments. However, it can give you a few more weeks to come up with the funds or find another solution. Some hospitals or financing companies offer medical credit cards, essentially high-interest credit cards that can only be used for approved medical-related expenses. However, they do have deferred interest accrual, so you have more time to come up with the funds before interest starts building.

Negotiate a payment plan or extension

Your lender may offer a payment plan or an extension to make your debt payments more manageable. The first step in pursuing this route involves calling the lender or checking the website to see if a relief option is available. Some lenders offer their customers hardship repayment, but it’s certainly not a guarantee, so you’ll need to make sure this is even offered — and you qualify — before banking on alternative payment options.

If you can’t find relief options on its site, call the lender’s customer service department to see if they would work with you. In specific circumstances, like a sudden loss of income or a medical emergency, the lender may be more willing to work with you, so always be upfront and honest with your situation as soon as possible to reduce the risk of missed or delinquent payments.

Here are a few examples of how a lender can provide financial hardship assistance:

• 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 leave free resources on the table. Also, it’s best not to wait. Inform your lender or institution when you hit financial turbulence and cannot make payments.

Get an advance on a paycheck

Your employer may give you the option of a paycheck advance loan, which allows you to access all — or part — of your next paycheck before your expected payday. Most of the time, you’ll have a borrowing limit of up to $1,000. Because you’re borrowing against your paycheck, you’ll be making less and will need to repay the balance prior to your next payday. If your employer doesn’t offer this option, you can turn to an early payday app, also referred to as a cash advance app.

Many apps charge few fees and carry low interest, especially compared to payday loans. Like employer advances, early payday options require you to repay the full balance on your next payday.

While you’ll have access to your money immediately, there are drawbacks to keep in mind. For one, there’s the potential for it to lead to unhealthy financial habits should you regularly lean on using future funds for unnecessary expenses. You’ll also have less money each paycheck each time you take out a cash advance, so make sure the money can be repaid and doesn’t impede your budget too severely.

Take out a personal loan

Personal loans can have several advantages for consumers with strong credit and a healthy financial record. 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. However, this may depend on the lender, as each company has different rules on what the funds can be used for. Before applying or banking on a personal loan, check with the lender’s customer service department or read through the terms and conditions to make sure it meets your needs.

Plus, if you have good-to-excellent credit or meet the lender’s minimum credit requirements, you could qualify for an unsecured loan. This means that while the rates will likely be higher and the eligibility requirements more stringent, you won’t have to put up property or an asset as collateral as you do with a secured loan.

While more risky for the borrower, secured loans often come out with much lower rates than payday or emergency loans. They’re generally much easier to qualify for, but you must back the loan with property like your vehicle, home or bank account.

If you fail to repay the balance or default on the loan, the lender can legally seize your collateral to satisfy your missed payments. That said, if the monthly payments fit comfortably into your budget and you’re sure you can make the payments both in the short- and long-term, then a secured loan is infinitely better than a payday or emergency loan due to the lower costs.

You can find secured and unsecured personal loans through banks, online lenders or credit unions. Online lenders generally offer the lowest rates, but if you already bank with a credit union or bank, they may offer exclusive benefits and member perks for taking out a personal loan. You’ll need at least a ‘good’ credit score or a creditworthy co-signer to qualify for most loans. Some lenders work with individuals with bad credit, although the rates are often higher (up to 35.99 percent), but still not as high as payday loan rates.

Consider a Payday Alternative Loan (PAL)

Payday Alternative Loans (PALs) are small loans offered by some federal credit unions. They typically are offered in amounts under $2,000 and are repaid over the course of a few weeks to a few months, depending on the credit union’s PAL details. These unsecured loans aim to provide credit union members a lower-cost alternative to predatory payday and emergency loans.

There are two types of PAL loans: PAL I and PAL II. Both have the same maximum APR (28 percent), but PALs II have a higher loan length and maximum loan amount. They’re generally easy to qualify for; you just need to be a credit union member, but for PALs I, you must be a member for at least one month before applying. However, they can be difficult to find, as not all credit unions carry PALs.

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. Ideal for debt consolidation, these credit cards feature an introductory period — typically up to 15 months — where no interest is charged. 0 percent cards don’t eliminate the debt, but they alleviate the immediate need to pay down all of your debt immediately.

You should only use this method if you’re positive you can repay your debts within the 0 percent period. Many of these cards tack on higher rates than other credit card options, so all unpaid debt will accrue interest at a potentially high rate once the period ends. This doesn’t mean you should throw in the towel and cancel the card once you’ve repaid your debt — that could hurt your score. To maintain a robust credit mix and a healthy repayment history, use the card for smaller purchases and set up autopay so you don’t accrue interest on forgotten payments.

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. These advances differ from advance apps and salary advances, as you’re not borrowing against your salary but your credit limit. Because of this, credit card cash advances are only recommended as a last-resort option as they come with higher fees and APRs than most credit card purchases.

As of February 2023, the average credit card purchase has an interest rate of nearly 21 percent. On top of this, 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 on top of higher interest rates.

Even so, if you’re in a bind and need money quickly, a credit card advance is still a much safer choice than going with payday loans. Not only are advances cheaper due to lessened interest rates, but they’re also a more practical option, with most offering a longer repayment option than payday loans.

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 you’ve built in your home and use it as collateral to back the loan balance. However, they’re a secured debt, which means they come with inherent risk. If you can’t repay your loan or if you default, you run the risk of foreclosure. While both home equity options are similar in financing, they’re used for different purposes and functions.

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 an installment loan, so you’ll receive a lump sum of funds upfront. Like a HELOC, it’s secured by the equity in your home, but you’ll be locked into a fixed 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. However, home equity products often come at a cost and carry fees similar to mortgage fees. HELOCs come with fewer fees but are generally larger loans. Home equity loans come with a myriad of costs, including but not limited to origination fees, appraisal fees, legal fees and filing or notary fees.

Borrow from your 401(k)

401(k) loans technically aren’t loans in the traditional lending sense. You won’t undergo a credit check and won’t work with a lender to obtain the money. Rather, 401(k) loans allow you to borrow from the funds you’ve built up in a 401(k) retirement account. Whether you can borrow from this account depends on your employer and the retirement plan they have set up.

The maximum amount you can withdraw is currently $50,000 or 50 percent of your balance, whichever is less, and you’ll have up to 5 years to repay the balance. If you use the funds to purchase a home, there’s a chance that you could have a longer repayment term — up to 25 years. However, you can’t use old accounts, and if you leave your employer while in repayment, you’ll have until the due date of your federal income tax return to repay the loan.

Keep in mind that while this may be a convenient way to get the cash you need quickly, it is diminishing your hard-earned retirement fund. Carefully evaluate where you are in your career and if dipping into retirement is recoverable and won’t hurt your future finances.