Payday loans are short-term loans approved with the understanding that the loan will be repaid when borrowers receive their next paychecks. However, these loans generally carry high-interest rates. While the features of a payday loan vary from state to state, most loans are for small amounts (generally less than $500).
They usually have to be repaid within four weeks, and the borrower must guarantee repayment with either an auto debit or a post-dated check.
The disadvantages of a payday loan include the high-interest rate, the lender’s ability to automatically withdraw funds from the borrower’s checking account and the short duration of the loan. There is a danger of becoming trapped in an endless loop if a borrower uses payday loans for monthly expenses or cannot cover the repayments.
Therefore, you should consider alternatives that may be more forgiving before applying for a payday loan. The sections below go over alternatives to payday loans that could help you save money in the long run.
Create a Payment Plan
Most people apply for a payday loan because they owe money on a current debt such as a credit card, or to make an emergency purchase such as a washing machine or car repairs. Instead of borrowing money for a current debt or purchase, ask for a payment plan.
A payment plan allows you to make a purchase in installments, rather than requiring you to pay the full price upfront. You may be surprised by how often a creditor or seller is willing to negotiate a payment plan that fits your budget. Even if they charge interest on a payment plan, it is far less than what you pay on a payday loan.
Use a Balance Transfer Credit Card
While it may sound counter-intuitive to apply for a credit card to pay off debts, it makes sense if you find a credit card offering low- or no-interest balance transfers for a period of time. A balance transfer card allows you to move your debts onto the card at low or no cost. This can save you a substantial amount in interest and improve your credit score if you pay on time.
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This option is best if you have good credit and are currently employed. The interest rates you have access to depend on your credit score, so the better it is the more you will save. While you still pay interest on a balance transfer card, it is far less than the 300 percent annual interest charged for most payday loans.
Ask for an Advance
In some instances, you can ask for an advance on a portion of your employment income. While some employers are willing to give employees a pay advance, some are not. If you have a short-term expense or simply have bills coming due before your paycheck is issued, this can be an alternative that works on a one-time basis. Remember, however, that when payday arrives you will not be getting as much money as usual and budget accordingly.
Apply for a Personal Loan
There are several advantages to a personal loan – you can pay them off over time and you pay installments, not a lump sum. If you have good credit and you need more than five hundred dollars, a personal loan may help.
Although the interest can be as high as 30 percent, it is still much less than what you pay on a payday loan. Additionally, you have anywhere from six months to five years to repay the loan. If you pay on time each month you can also improve your credit score.
Talk to Your Credit Union
If you belong to a credit union, you can apply for a Payday Alternative Loan (PAL) for any amount up to one thousand dollars. Like a payday loan, you can get approval even with less than perfect credit and you get your money quickly.
Unlike a payday loan, you have between one and six months to repay the loan. Interest rates can be as much as 28 percent, but they are still far lower than payday loan interest rates.
If you do not belong to a credit union, this is a good reason to join one now. You need to belong to one for at least a month before applying for a PAL loan.
Borrow Against Your 401(K)
Borrowing against your 401(K) retirement plan is an option most people do not consider. However, it can be a good way to come up with needed funds for a short-term cash flow problem.
You do not have to pay taxes on money borrowed from your 401(K) if you do it properly and you do not have to pass a credit check. Instead, you pay the interest back to your own 401(K) fund.
If you can pay back the loan in one or two years it should not have a serious effect on your investments. However, you must be cautious withdrawing from your 401(k) to avoid draining it.
Borrow Against Your Whole Life Insurance Policy
If you have a whole life insurance policy in place, you can borrow against the cash value of the policy. The interest rates are reasonable, generally charging around 10 to 15 percent. That is less than most credit cards and lending institutions charge.
Additionally, you have your entire life to repay the loan. If you do not pay it back before you die, the amount borrowed is deducted from the cash value of the policy.
Ask Friends or Family for Help
While it can be difficult to ask your family or a trusted friend for help, it is one of the most financially sound options. In many cases, you have a generous length of time to pay back the loan and you may not have to pay any interest. It is crucial you have a good relationship with the person lending you the money and you are sure you can pay him or her back.
To protect your relationship and make sure everyone is on the same page, write up a loan agreement and have all parties involved sign it. Because you are blending business with friendship and family, borrow only what you truly need and do not take advantage of the other person’s generosity.
Find Extra Income
If you have the time, find a temporary extra job. During the holidays, many retail establishments are looking for additional help. You could ask to put in overtime hours at your current job or take on a side job such as babysitting.
You may also be surprised by how much money you can raise by selling things you have but do not need. Anything from video games you no longer play to furniture you have stashed in the attic can be sold online to make some quick cash.
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