12 Alternatives to Payday Loans

According to NBC News, there are more payday lenders in America than there are McDonald’s restaurants. With 20,000 locations across the country, chances are you have a payday loan storefront in your area. When times are tough, you may be tempted to run to the nearest payday lender and request a loan. Since these loans are notorious for charging exorbitant fees with quick repayment dates, they are less than ideal. Instead, take a deep breath and consider one of the following 12 payday loan alternatives.

1) Local charities

It’s worth taking the time to reach out to local charities, including churches, if you have a pressing financial need. Churches often have benevolence funds set up specifically to meet the needs of the community. They are ready to help with medical bills, late utilities, groceries, and in some cases, transportation. Catholic Charities is another excellent organization to contact. You don’t have to be Catholic to get help, and the organization is set up with multiple programs to assist those in need.

2) Paycheck advance

If you’ve been with the same company for a few years, ask your boss for a paycheck advance. If approved, you may get the same amount as you would with a payday loan, but without the interest fees. It’s important to note that you shouldn’t go with this option if you’ve just started a new job. It’s best for employees who have already established themselves as hard workers that are valuable to the company.

3) Payment plan

Companies are often willing to negotiate and create new payment plans for their customers, even though they don’t advertise this as an option. Whether you’re behind on an electric bill or a car payment, you can contact the company to make a new arrangement. Some utility companies can put you on a special payment plan, as well as direct you toward any local energy assistance programs. An auto loan lender may be willing to allow you to skip a month by taking that payment on to the end of the loan. You won’t know unless you ask.

4) Personal loan

The Federal Reserve listed 9.5% as the average interest rate for a personal loan in May of 2020. If you already have a relationship with a bank in your area, try applying for a small personal loan to help you get through your difficult time.

5) Payday Alternative Loan

If you have an account with a federal credit union, you can actually apply for a payday alternative loan (PALs I and PALs II). The PALs I requires individuals to have been a member of the credit union for a period of one month, while the PALs II loan is available immediately after membership has been granted. Loan amounts range between $1 and $2,000 and are due to be repaid in installments over a period of one to 12 months. Interest rates are capped at 28%, which is far cheaper than a 391% payday loan APR.

6) OppLoans

OppLoans provides personal loans to individuals with less than perfect credit. They operate entirely online in 37 different states. While their interest rates are high (between 99% and 199%), payments are spread out over several months, unlike payday loans. This makes it easier to repay the loan without having to take on more debt later on. Since the loan is classified as a personal loan, the funds can be used on just about anything, including vacation expenses and wedding costs.

7) Credit card cash advance

Credit card cash advances certainly aren’t ideal, but they are far better than taking out a payday loan. The Citi Simplicity card has a 25.24% APR for its cash advances, while the Discover it card charges a 24.99% APR for the same service. It’s important to always check your credit card’s cardholder agreement, as some cards tack a fee on to the cash advance. Most also put a cap on how much of your credit card limit can be used toward a cash advance. For example, you may have a $10,000 credit card limit, but they company may only allow you to use $2,000 of it for a cash advance.  

8) Peer-to-Peer lending

If you aren’t having any luck with a traditional back or lending institution, you’ll want to give peer-to-peer lending a try. This method allows you to request a loan from another individual. You’ll make a proposal that includes the reason you need the loan. If the proposal is accepted, you’ll need to agree to the lender’s terms. You can expect the interest rates to exceed those of a personal bank, but not jump as high as a payday loan. A few popular peer-to-peer lending companies include Peerform, LendingClub, Upstart, Prosper, and Funding Circle.

9) 401(k) loan

Should your boss be reluctant to grant you a paycheck advance, you can borrow from your 401(k). As long as you make the scheduled payments and fully repay the loan within the designated time period, you won’t have to pay any taxes on the withdrawal. Keep in mind though, that if you leave your place of employment, the entire amount of the loan that you have remaining will come due.

10) Side hustle

Instead of looking for ways to borrow money that will further increase your debt, consider taking on a temporary side hustle until you have enough money to cover your shortfall. You can mow lawns on the weekends, babysit in the evenings or rent out your car on your day off. A few other options include selling unwanted items, cleaning a few houses, and pet sitting.

11) Credit counseling

Sometimes it’s helpful to have an outsider take a look at your finances. Many banks and credit unions offer free credit counseling to their clients. If your financial institution has this service, sign up for it. The counselor can help you create a budget that includes cutting back on unnecessary expenses and provide you with a plan for repaying any debts. They can also negotiate lower interest rates on the loans you currently have, which can save you big over the course of several years.

12) Family and friends

While it can be hard to sit down and ask your friends or family members for a loan, it’s a good idea when you’re in a pinch. They won’t charge you interest and are more likely to come up with a repayment plan that works with your budget. 

What Should You Do If You Already Have Payday Loans?

If you already have one or more payday loans and are struggling to break out of a cycle of debt, the best first step is to stop taking out more of them. Don’t resort to another lender with triple-digit interest rates. Even if you’re unable to repay your debts and need some cash, resorting to another payday loan will only make the problem worse and put you deeper in debt.

Mary-Jo Kranacher MBA, CPA/CFF, CFE. ACFE Endowed Professor of Fraud Examination and Professor of Accounting for the School of Business & Information Systems at York College, CUNY

What advice do you have for someone who is struggling to get out of payday loan debt?

  • Make a plan. The first step for anyone who is struggling to get out of any sort of debt, especially payday loan debt, is to make a plan. It’s always easier to pay down your loan debt if you don’t actually receive the money in your hands and, therefore, not tempted to spend it. So having the funds automatically withheld from your paycheck is the way to go.
  • Create (and adhere to!) a budget. Using debt to purchase extravagant non-essentials, that you can’t afford to pay back, compounds the financial pressure many are feeling today. If total purchases don’t fit within your monthly budget, you’re probably spending too much.

For someone who has multiple loans (payday or otherwise), how should they determine which to pay first?

When saddled with multiple loans, look at the interest rates on each. Higher interest rates increase your debt more quickly and make it harder to pay off. Prioritize paying the loan with the highest rate first, and just pay the minimum on the rest, until each is paid in full.

What are some alternatives to taking out a payday loan?

Almost any type of debt is preferable to a payday loan. Here are some alternatives to consider:

  • Home equity line of credit (HELOC) – If you’ve built up equity in your primary residence, chances are you may qualify for a home equity line of credit. Most lenders will establish a line of credit to the homeowner based on 75% of the appraised value of their home less the amount of any existing mortgages. Homeowners only pay interest on the money they withdraw (borrow) from the HELOC, and, as it is repaid, it becomes available for re-use, as needed.
  • Borrow from your 401(k) – Although early withdrawal of money from your 401(k) prior to reaching age 59 ½ can incur serious financial penalties, a loan against your retirement account doesn’t incur any taxes or penalties, so long as you follow the rules—repaying according to schedule. Furthermore, you’re paying interest back to your own account.
  • Personal loan – Personal loans are a traditional borrowing arrangement whereby the lender provides the needed funds, and the borrower pays back the loan on a fixed schedule. This option doesn’t offer same-day funding, but it is significantly less costly than a payday loan.
  • Family or friends – This should be a last resort! And only if you’re reasonably certain that repayment can be made in full and on time! Mixing business with a personal relationship can cause problems in the relationship, especially if you don’t uphold your end of the deal.

Is credit counseling helpful?  What should consumers look for in a credit counselor?

Credit counselors may help you to manage your money, develop a budget, obtain a copy of your credit report, and create a debt management plan to reduce your debts.

Consumers should seek out credit counselors, who are either accredited or certified in this field. Established nonprofit organizations accredited by the National Foundation for Credit Counseling or financial professionals—i.e. Certified Public Accountant(CPA) or Certified Financial Planner (CFP)—certified by their state are more likely to have your best interests in mind. Reputable credit counselors should not charge you a fee for information about their qualifications or their services, and you’ll want someone who offers a broad range of services.

Do you think that the payday loan industry is currently adequately regulated? Do you expect any new regulations aimed at the payday lending industry?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau (CFPB) to regulate payday lending, as part of its responsibilities. The Federal Trade Commission (FTC) enforces various laws regarding payday loans, including deceptive advertising, unfair billing practices, failure to disclose, and abusive debt collection practices, among other things.

While industry lobbyists continue to push for easing of restrictions on payday lenders, the Center for Responsible Lending has advocated for strengthening federal protections against predatory lending, and implementing a federal interest rate cap on all loans to protect consumers. 

Effective October 20, 2020, a final CFPB rule revoked the “ability-to-pay” provision that required payday lenders to evaluate a borrower’s financial circumstances prior to approving a loan. This decision is certainly at odds with the agency’s statutory mission and purpose. The new Biden administration may encourage the CFPB to revisit this rule, to return the agency to its intended role of protecting consumers from predatory lending practices.

Due to the high-interest rates that payday lenders typically charge, Mary-Jo Kranacher, Professor of Accounting at York College, CUNY, describes personal loans as having, “predatory rates [that] can make it nearly impossible for consumers to get out of a vicious cycle of debt.” If you are stuck in the vicious cycle of debt also known as the payday loan trap, use the payday loan alternatives listed above instead. They’re much more sustainable as a long-term financing plan. Once you eliminate the need for more payday loans, it will become infinitely easier to break out of your debt spiral. Even if you have to rely on other forms of credit in the meantime, their interest rates are much more affordable, and you won’t feel like you’re stuck in financial quicksand.