Why You Should Seek an Alternative to Payday Loans When You Need Cash

Payday loans are expensive!

These short-term loans carry crazy high-interest rates and fees. Though they can help you out in an emergency, they can also start a cycle of debt that’s hard to break out of.

Here are other options than a payday loan you should consider and how selling your home for cash may be a better alternative for your situation.

What Are Some of the Alternatives to Payday Loans?

There are many options available if you find yourself in financial hardship. We’re going to look at payment plans, personal loans, paycheck advances, 401(k) loans, credit union alternative loans, and credit card advances.

Payment Plan

Before you try to track down a source for extra money, you could ask your creditor if a payment plan is feasible. You would pay a small amount per month instead of a lump sum, which would make your debt more manageable.

For example, if an outstanding debt is making it hard for you to pay basic expenses, you may be able to work out a deal. Some credit card issuers have hardship programs where you can temporarily suspend or reduce payments if you’re in a bind. Your interest rate could be lowered as well.

You don’t know until you ask. If you explain that you’re having trouble making the rent, paying the electric bill, or buying groceries, the creditor might cut you a break. The worst thing that could happen is that they say no.

Personal Loan

Have you tried asking your bank if they could lend you some money? With a personal loan, you can borrow cash with rates that are usually much lower than payday loans. We’re talking 10-40% with a bank vs. 400% with a payday lender.

You don’t even have to go to the bank; there are plenty of lenders online. You shouldn’t have to disclose too much personal information until you pick one to apply with. In general, personal loans give you a longer time to pay back the money—whereas a payday loan could come due in just a few weeks.

There are also peer-to-peer lending apps where a crowd of investors can fund your loan. Prosper, Lending Club, and Peerform are a few examples. Borrowers can get money without having to go to a bank, and lenders who have the cash can make some money off the transaction.

Paycheck Advance

Another alternative to payday loans is getting a paycheck advance. Your employer must be willing to give you money early based on the work you’ve already completed. This type of transfer doesn’t usually involve interest. However, your next paycheck will likely be short or you will have to pay the money back in some fashion.

A second option is signing up for a bank account that will give you early access to your paycheck funds. Some online lenders let you have the money up to two days before the deposit. The amount you can withdraw varies, but you should expect somewhere in the $100-$250 range.

A paycheck advance is a short-term fix and shouldn’t be relied on as a long-term solution. If your employer is helping you out, you definitely should not continue to ask for paycheck advances, which would strain your relationship.

401(k) Loan

If you want to bypass asking your employer for a paycheck advance, you could take another route to a workplace resource: your 401(k). This loan is a valid option if you truly have no other alternatives.

Borrowing against your 401(k) doesn't require a credit check. You also won’t incur any taxes as long as you follow the rules. You must repay the loan according to a schedule—or in full if you leave your employer.

You will pay interest back to your account on a 401(k) loan. The impact on your long-term gains should be minimal if you replace the money within a year. One caveat: your employer may not let you make new contributions while you're in the process of repaying the loan.

Credit Union Alternative Loan

Credit unions can offer refinancing, personal loans, and other creative solutions to your money woes. Plus, they’re non-profit organizations, so they’re focused less on making money and more on helping members.

A credit union’s loans and accounts tend to have favorable interest rates and fees compared to banks (and particularly payday lenders). These financial institutions also may have less rigid eligibility requirements.

A payday alternative loan (PAL) is available through the chartered National Credit Union Association. These loans, backed by the U.S. federal government, are available up to $2,000 with repayment terms of one month to 12 months. You can get three PALs every six months, but they cannot overlap or be rolled over.

Credit Card Advance

When you take out a credit card advance, you only pay for the money you borrow. The interest rates and APR are usually much lower than a payday loan. Most credit card issuers will charge a percentage of the advance—which is typically around 5% with a minimum of $5 to $10—as a fee.

With this type of advance, you can use what you need up to your limit over and over again because the credit is revolving. You can get the money fast, and there’s no approval process to navigate.

A note of warning: a credit card advance could affect your credit score because it increases your credit utilization. There’s also no grace period; interest accumulates as soon as you get the money.