Are you struggling financially and looking for a way to keep the lights on until your next check comes? If so, you may see check cashing outlets and payday lenders advertising quick cash through payday loans.
But these "fast cash" loans usually come with massive interest payments that could keep you mired in debt long past your next payday. In this article, we explain what payday loans are, why you should do your best to avoid them, and the best alternatives.
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What Is A Payday Loan?
A payday loan is a short-term (usually 15 days or less), high interest, no-collateral loan. Often people take out payday loans when they are facing a dire situation and have no money. Typically, these loans are expected to be paid back in full when you receive your next paycheck.
These predatory loans are often made available at check cashing outlets and other locations where underbanked people deal with their finances. Frequently, people who take out payday loans will end up renewing their payday loan (in states where this is allowed) for several months until they can afford to pay off the loan.
Why Payday Loans Are So Dangerous?
Payday loans tend to make bad financial situations worse. With interest rates as high as 400% APR, paying off a payday loan is nearly impossible, especially if you were cash-strapped to begin with.
A Consumer Financial Protection Bureau (CFPB) study found that only 15% of new payday loan borrowers manage to pay the loan off after two-weeks. The majority end up falling into debt again, with the typical borrower taking out six or more payday loans per year.
If you’ve got bad credit, or no credit, you may think that a payday loan is your only option. But that’s not true. Even people scraping by can have some element of control in their financial lives. You can avoid payday loans, but you need to know how to do it.
Best Alternatives To Payday Loans
Payday loans are typically for $500 or less. Getting your hands on a few hundred dollars may not be easy, but there are alternatives that can help you avoid debt altogether. Here are a few of your best options.
Sell A Big Ticket Item
If you’re driving a car that’s too expensive, or you have a bicycle, power tool, computer, phone, or furniture that’s in good shape, you may be able to sell it and use the proceeds to avoid debt.
Take great pictures of the item, offer it at a fair price, and post it on multiple sites. When someone reaches out to you, respond immediately, so you can increase the odds of actually making a sale. Here are 6 things you can sell for extra money right now.
Earn Extra Income
Jobs don’t grow on job trees and extra income can be hard to come by. But side hustlers can often come up with a few hundred extra dollars by simply letting people know about their services.
If you can offer lawn care, house cleaning, babysitting, tutoring, car detailing, or any other service, let people know that you’re willing to work now. Text specific people who have hired you in the past or advertise your services on social media. Who knows? You may come up with a profitable new side hustle.
Negotiate An Extension For Your Pressing Bills
If a payday in 10 days will solve your financial problems, you may have room to negotiate for an extension on your payment. Many lenders, landlords, and utility companies may be willing to waive your fees or offer other concessions if you approach them proactively to negotiate. Remember, they want your money, and a few days late is better than never.
Ask For Help From Family And Friends
Your friends and family may not have the money to help you out with a loan. But even so, they may be able to provide help in other ways.
Family members may be willing to feed you for a few days. A coworker may be willing to give you a ride to work. A parent may be willing to let you move back in for a few months while you stabilize financially.
The people who love you want to see you succeed. They can help you for a while. And when you’re in a better position, you can help them or another person in need.
Take Out A Personal Loan From A Bank Or Credit Union
If you have good to excellent credit, you may qualify for a non-predatory unsecured personal loan from a bank or credit union. According to the Federal Reserve, the average interest rate for 24-month personal loans is currently 9.50%. Here are some of our favorite places to apply for personal loans.
Credit union members can also apply for Payday Alternative Loans (PALs). These are small ($200 to $1,000) short-term (1 to 6 months) loans like payday loans. But they come with much lower interest rates and fees.
Borrow From Your 401k
Taking out a 401k loan isn’t a decision to take lightly as you’ll essentially be borrowing from your retirement. You’ll lose out on the power of compound interest while the money is withdrawn and you’ll incur taxes and fees if the money isn’t paid back by the due date (usually 5 years).
However, there are advantages to 401k loans. You don’t need to pass a credit check to take one out. And the “interest” that’s charged on the loan is paid to yourself rather than a lender. Learn more about the pros and cons of 401k loans.
Okay Alternatives To Payday Loans
Earning income and cutting expenses are great ways to avoid payday loans (and every type of debt). But sometimes those options aren’t available to you. These options aren’t ideal, but they may be better options than payday loans.
Strategically Delay
If you’re earning a reasonable income, and you’re facing a cash crunch, a payday loan will only hurt you in the long run. Instead of taking out a debt that will rear its head every two weeks, consider delaying payment on some or all of your bills. Pay your most pressing bill (that parking ticket or the overdue utility bill) along with as many small bills as you can handle.
Strategically delay paying your largest bill (like your rent) until you have enough money to cover it. You can handle paying a $50 late fee on your rent (this one time only) better than you can handle a balloon payment every two weeks. This is a strategy you may be forced to deploy if negotiating with lenders or landlords fails.
Get A "Friends And Family" Loan
If you’ve got a parent, sibling, cousin or friend with financial means, you can ask for a loan. The people in your life may be willing to help you out financially if you have excellent character and a way to pay them back.
These types of loans are often 0% interest, which is nice. But it's incredibly important to pay them back. Your grandma may only have a meager Social Security check coming in each month. So if she stretched herself to help you out, you owe it to her to pay her back as quickly as possible.
Float Expenses On A Credit Card
Most consumer credit cards have at least a 30-day window before interest accrues on a purchase. If you have credit available, you may be able to put expenses on the card and pay it off once you get paid.
The habit of floating expenses can be a tough one to break and could lead to credit card debt problems. That said, credit card debt is generally preferable to payday loans, especially if you qualify for a 0% APR credit card.
Take A Cash Advance
If you’ve got credit available, a cash advance can be a way to get money immediately at a lower interest rate than payday loans.
The interest rate on a cash advance is often 30-36% APR and the interest begins accruing as soon as you borrow. Paying back a cash advance as soon as possible is critical to reducing your interest charges.
While not ideal, a cash advance can get you through a crunch. Some apps also allow users to take cash advances as well. Rates and fees on cash advance apps vary.
Worst Alternatives To Payday Loans
Payday loans have (rightfully) earned a terrible reputation in the public at large, so many people will try to avoid them at all cost. However, there are “payday loan alternatives” that are as bad, or worse, than payday loans. These are some of the alternatives you'll want to avoid.
Title Loans
Title loans are short-term (usually 30 day) loan where you put your car up as collateral for the loan. If you don’t make the payment on your title loan, you’ll lose your car.
Title loans may have lower interest rates than payday loans, but borrowers still tend to get trapped in a debt cycle. In fact 80% of title loans are renewed the day the balloon payment comes due because borrowers cannot afford to pay off the loan.
The threat of repossession is real. In most cases, it is better to negotiate payment on a debt or temporarily leave it unpaid than risk losing your car.
High-Interest Installment Loans
Typically personal loans have interest rates ranging from 5%-36%. But, in some states, lenders can legally issue installment loans with APRs as high as 100%. These are technically a bit better than payday loans. But paying an equal amount of interest as principal is still a terrible deal and is something you'll want to avoid whenever you can.
Pawn Shop Loans
If you’ve got assets like tools for your business, jewelry or a musical instrument, you may be able to put it up as collateral on a pawn shop loan. You'll have a set period of time to pay back the loan before the pawn shop keeps your items forever.
The interest rates and fees on these loans can add up, but that’s not even the biggest problem. If you can risk losing the item, you might make a lot more money just selling it yourself than using it as collateral for a loan. Even a “fire sale” of a bicycle, tool, or other household item can yield a few hundred bucks.
Final Thoughts
You might be facing a really tough financial situation right now. But the tough reality is that a payday loan is unlikely to help. Instead, it's more likely to lead to a cycle of high-interest borrowing.
But the good news is that with creativity, resourcefulness, and help from those around you, it's likely that you can avoid the payday loan debt trap. For more ideas to help you steer clear of payday loans, check out the best ways to cover emergency expenses.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications, including the New York Times, Wall Street Journal, Washington Post, ABC, NBC, Today, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Chris Muller