Alternatives to Using a Payday Loan

If you're considering taking out a payday loan, the following is probably true:

• You need money quickly; and
• Traditional loans and credit cards may not be an option for you.

Payday loans (sometimes called fast cash loans) can be perfectly valid, but it's a product that can be abused by predatory lenders because the target audience is often very financially vulnerable. As such, payday loans are usually best avoided if possible. But what are your alternatives if you need cash quickly?

What's a Payday Loan?

If you’re not familiar with payday loans, they’re essentially short-term loans marketed as bridge solutions to help consumers pay unexpected expenses in-between paychecks. Consumers borrow a relatively small amount of money (a few hundred dollars) using their next paycheck as collateral. The trouble with payday loans is that the loans often don't work as advertised.

That's because the idea of the payday loan is that once you receive your next paycheck, you use the funds from your paycheck to repay the loan. The reality, however, is that even with your next paycheck, you may not be able to repay your loan. 

If your budget is so tight that you need to borrow money to make it to your next paycheck, then it's likely that every dollar in that paycheck is already accounted for. There's rent and groceries and utility bills and so on. And when that's the case, you may be forced to roll over your "short-term" loan. 

The problem with rolling over the loan is that typically payday loans come with extremely high interest rates, hundreds of times higher than credit cards or other loan rates. Even if the loan principal is relatively small, the interest charge can be substantial. And if you were having a hard time paying back the loan to begin with, that interest charge only makes it harder.

This is why people using payday loans sometimes end up in a vicious cycle, where all they can afford to do is pay the interest charge every billing cycle, creating a debt that ends up costing significantly more than you originally borrower.

Best Alternatives to Payday Loans

When you're in a financial emergency, your options may be limited, which is why it's best to think about these things before your facing an emergency. But whether the emergency is here or on the horizon, here are some options you may want to consider before committing to a payday loan.

Build an emergency savings account

Building an emergency savings account can be tough, especially when money is tight. But the value of that preparedness can’t be overstated. The ability to maneuver through an unexpected setback without adding debt or creating potential future hardships is worth the effort.

If you don’t have money socked away for a rainy day, start working on that today. Having to burn through your savings in the face of a crisis is painful, but substantially less painful than spending years trying to work your way out from under debt.

Use traditional credit

One of the major issues with payday lending is that the terms are not very consumer friendly. The loans are sold on the premise that you can get the cash you need quickly, without much of the review process that traditional lenders go through. You pay for that convenience, however, with big fees and even bigger interest rates.

Even the worst credit card rates are usually more than ten times lower than payday rates. If you can’t get a credit card, get a secured credit card and use it to start building up your credit history. Show lenders that you can use credit responsibly and it’ll be much easier to get favorable terms when the unexpected happens and you need to open a credit account or take out a loan (like a home equity loan or an unsecured loan).

Get an advance on your paycheck

Depending on how you're paid, it may be two weeks or longer before the money you've already earned to given to you. A payday loan is treated as a form of a payment advance, where people who can't wait for payday are essentially borrowing against their own earnings.

But there are other, less costly ways to access your own money earlier. 

You can check with your employer to see if they offer some form of advance. Some employers offer programs to help employees facing a hardship receive a portion of their paycheck in advance.

You can also check with your bank or credit union to see if they offer some form of advance program. There are even some money management apps that offer small cash advances against your direct deposited paychecks. 

Borrow from friends and family

It’s awkward. It’s uncomfortable. It’s something you’d probably rather avoid whenever possible. But in an emergency situation, borrowing money from friends and family is an option – and it’s entirely preferable to using a payday loan.

Many of the consumers who become trapped in the expensive cycle of payday loans ultimately end up soliciting help from friends and family in order to finally break free from their debt. And that’s usually after many loans and sometimes thousands of dollars in fees and interest. Don’t even start down that road.

The key to borrowing money from friends and family is setting clear terms and expectations. Formalize the arrangement by putting everything in writing. Set dates and keep communication open.

It’s not fun to borrow money from loved ones, but if you keep your agreement formal and follow through on your end, it can be a very good alternative to expensive payday loans.

In every scenario, the best way to manage a crisis is through preparedness. That’s not a lot of help to anyone currently in a bind, but hopefully serves as a wake-up call to everyone in the midst of calm financial waters. If you aren’t currently prepared to handle a major setback, today’s the day you start becoming prepared.

And if you struggling with old debts that you can't seem to shake, take our online financial analysis and see if a debt management plan is a good choice for you.