WHEN YOU’RE STRAPPED for cash, the payday loan promise of fast money with no hassle can seem like an attractive option. But is it your only option?
The ease with which borrowers can get their hands on funds to float them to their next paycheck often takes a financial toll. According to the Center for Responsible Lending, the average annual percentage rate on payday loans is a staggering 391%.
Payday loans are problematic due to high interest rates, but renewals can be an even bigger danger, says Anna Serio, loans writer at Finder. “Each time you roll your loan over for another month, you usually have to pay a fee. Renew more than once and you can end up owing more in fees than you originally borrowed, and get caught in a cycle of debt.”
The good news is payday advances aren’t your only option if you’re in a financial pinch. Here are seven alternatives to consider.
Find the Best Personal Loan Option for You
Before you make the leap to taking out a payday loan, see if there’s a way to make your current situation more manageable.
For instance, if a looming credit card or other loan payment is jeopardizing your ability to pay for basic expenses, see if you can work out a deal. Many card issuers offer hardship programs that allow you to temporarily reduce or suspend payments in the event that you’re unable to pay. Alternately, they might agree to lower your interest rate to help make your payments more manageable.
“If you’ve come across any setbacks that prevent you from paying your bills on time, reach out to your lender to see if you can have an extension,” suggests Rebecca Gramuglia, personal finance expert at TopCashback. If you’ve been a good customer in the past, they’re more likely to accommodate your request. In any case, she says it’s best to be honest and upfront with your situation.
While banks might have a reputation for red tape and slow processes, you shouldn’t pass up your local financial institution when in a pinch. If you need money for a specific purpose, a personal loan from a bank or credit union could be a much cheaper alternative to a payday loan.
But you aren’t limited to brick-and-mortar institutions. Online lenders such as SoFi and Earnest allow you to see what rates and terms you qualify for without performing a hard credit check. Though these options don’t offer same-day funds like payday loans might, some personal loan options can fund your bank account within a few days if you’re approved.
Payday Alternative Loan
Some credit unions offer payday alternative loans, short-term loans designed to prevent borrowers from opting for high-interest payday loans.
These loans are available in amounts of $200 to $1,000, with terms of one to six months. The issuing credit union can charge an application fee of up to only $20, according to MyCreditUnion.gov. You have to be a member of the credit union to take out a PAL, plus you must have been a member for at least one month to be eligible.
Keep in mind, however, that payday alternative loans can still carry high interest rates. For example, you might pay a flat fee of 15% or more or be charged an APR in the 20% to 30% range for the convenience of borrowing.
Credit Card Cash Advance
Relying on a credit card cash advance is never a cheap option, though it’s likely to be better than a payday loan. Most issuers will charge a percentage of the advance as a fee, usually around 5%, with a minimum of $5 to $10.
The key is to pay off the advance right away, before interest on the balance gets out of control. Unlike purchases or balance transfers, interest begins accruing on credit card cash advances immediately. If you allow the balance to linger month over month, your short-term loan could spiral into a long-term debt problem.
An advance on your paycheck might be the answer to your short-term cash flow problem. Not all companies offer these types of loans, and the terms vary. But it’s crucial you understand that it is, in fact, a real loan that you need to pay back according to the agreed-upon schedule.
It’s possible to tap into another workplace resource without counting on your boss’s approval: your 401(k). Although traditional advice would have you run for the hills before taking money out of your retirement account, a 401(k) loan is a valid option if you’re truly stuck.
Borrowing against your 401(k) doesn’t incur any taxes, so long as you follow all the rules. That means repaying the loan according to schedule or in full if you leave your employer for another company. It also doesn’t require a credit check, and you pay interest back to your own account. As long as you pay back the loan within about a year, the impact on your long-term gains should be minimal. Just keep in mind that your employer may not allow you to make new contributions to your 401(k) while you’re repaying a loan. That could slow down your progress in growing a retirement nest egg.
Family or Friends
Finally, if digging yourself deeper into debt due to fees and high interest rates is a real concern, consider turning to a trusted family member or friend for financial help.
This option can be tricky to navigate but could be a good choice if it allows you to avoid the sky-high interest and fees of a payday loan. Borrowing money from a friend turns a personal relationship into a business one. You need to be comfortable with the fact that you are indebted to that person, and the relationship could turn sour if you fail to uphold your end of the bargain.