How To Avoid Payday Loans

Payday loans offer a fast but expensive and sometimes dangerous way to borrow money.

The Consumer Financial Protection Bureau (CFPB) calls a payday loan a “short-term, high-cost loan” that typically must be repaid on a person’s next payday or no more than four weeks from the date of the loan.

Though states have different laws, payday loans are typically available at store-front businesses that offer an “easy” way to get cash at a very high price.

Payday loans are mainly used by people in desperate need of money. That could include those who have fallen on hard times through misfortune, or those who have squandered their money.

Those who may need money to feed their children or to heat their home may turn to this method of borrowing. They may gain cash quickly, but it will come at a very high price – and often will lead to a spiral of growing financial struggles.

For that reason, it’s wise to avoid these high-risk loans.

Issues With Payday Loans

There are many negatives to payday loans, chief among them the cost. Consider that 18 states have “limited” interest rates on payday loans to 36%. That “limit” is a staggeringly high rate, especially when you consider that the mortgage rate is only 7.4% and the interest rate for credit cards is around 24%.

But that’s not even the worst news about the cost of payday loans. Typically, payday loans charge a fee per $100 borrowed, and that fee is $15-$30. That comes out to an astronomical 399% APR!

These high costs lead to struggles in repaying the loan, especially given the time limit to repay can be as short as two weeks. That leads to default, when the borrower does not repay, which leads to late payment fees and decreased credit and credit scores.

In addition, some payday loans come from predatory lenders. If a borrower can’t repay the loan, instead of offering some way to help, a payday lender may force more borrowing at a higher fee, which only deepens the debt spiral we all are trying to avoid.

Again, payday loans are a type of borrowing best avoided.

Best Alternatives to Payday Loans

Options exist to those badly in need of cash, but want to avoid the seedy world of payday loans.

It’s wise to consider all the following and see which is best for your individual situation. These options include helping those with bad credit.

Prior to asking for any loan, it also would be wise to consult with a nonprofit credit counselor who can assess the financial picture and offer clear and helpful ways to reduce your debt.

We’ll explain more on that later, but first let’s take a look at alternatives to payday loans.

1. Apply for a “Bad Credit” Personal Loan

A “bad credit” personal loan is for those whose credit score is low, or who have a short credit history. These loans do not require collateral (such as a car or home) but do require a credit check.

The interest rate for these may not be low. Bankrate lists several loans that have interest rates that could be as low as 6.7% but could go as high as 36%. With a poor credit score, you’re going to be closer to 36% interest than 6.7%. In addition, these loans usually charge origination fees, which increases the cost.

Personal loans can be used to buy groceries or pay bills, if you are in a financial pinch. Though you can borrow larger amounts of money than you can with payday loans, the main negatives of these loans are the costs. It’s vital to understand the interest rate and other costs and what your monthly payment to repay the loan will be.

The better your credit the better your interest rate, though a cosigner willing to put his or her name on the loan can help with qualifying and the interest rate.

2. Consider a Payday Alternative Loan (PAL)

A Payday Alternative Loan (PAL) is offered by some credit unions to help its members avoid the pratfall of a payday loan. All credit unions that are members of the National Credit Union Administration offer these loans, but the borrower must be a member of the credit union.

These loans charge an application fee of up to $20 and allow those in financial straits to borrow between $200 and $1,000. Interest rates typically mirror those of credit cards. That’s not low, but is mitigated by the short timeframe to repay. Loans can be set up to repay in 1-3 months, and borrowers may set up three PALs in a six-month timeframe, provided no PAL overlaps or is rolled over.

These loans cost less than payday loans, yet still provide fast cash. Given the option of a PAL or a payday loan, the answer is easy: Take advantage of your credit union and the PAL. You could even use the PAL to pay off a payday loan.

3. Ask Your Creditor about a Payment Plan

Some people are surprised at the lengths a legitimate lender will go to help a borrower repay a debt. For the lender, working with the borrower means it is helping ensure repayment and avoiding the hassle of potential default.

A payment plan means you and the lender agree you will pay the loan at a set monthly amount. While this plan may extend the time it takes to repay your debt, a lower interest rate and extended time would reduce the monthly payment, a big help to those in a cash crunch.

This option is good for those willing to reach out and advocate on their own behalf. Many medical facilities, for example, are more than willing to work out a payment plan, often at no interest. If you have a good history of making payments and have simply fallen on misfortune, a lender may well work with you on a payment plan.

Be sure to keep making at least minimum payments until the payment plan takes effect. And once it does, don’t mess around on payments. Lenders do not take kindly to their largesse being abused.

4. Nonprofits and Charities

Some nonprofits or charitable groups offer financial help to the needy. Others might offer services, like job training or mentorship. Others still offer food, help with rent, utilities, or clothing and some offer housing.

All of these groups cater their help to the needy or impoverished.

A few of the charities that provide some kind of help to the needy are:

• The Salvation Army
• The St. Vincent de Paul Society
• Feeding America
• Habitat for Humanity
• The National Urban League
• Family Promise

5. Borrow from a Credit Union

This is an excellent option for those who belong to a credit union, which is a not-for-profit financial institution owned by members that provides many of the same services as a bank.

A credit union may actually offer the best interest rate and lowest payment, provided the borrower is a member. Don’t merely assume the rate will be the best, though. Shop different institutions, including banks, to see the rate and monthly payment for what is borrowed.

The credit union will consider credit score and personal income as well as your history as a member when deciding on a loan. The loan won’t be free the way a charity grant or assistance may be, but it is a far better option than payday loans.

6. HELOC Loan

Those who have built equity in their home could borrow money using a Home Equity Line of Credit (HELOC). This lets you borrow against the equity, but be warned: If you don’t repay the loan, your home is at risk of being seized by the bank.

A HELOC is like a credit card in that the lender approves a certain amount you can borrow. You then have a set time to repay what you’ve borrowed.

The average interest rate for a HELOC in 2023 is around 8%, which is far lower than a payday loan. However, many HELOC loans have adjustable interest rates, so they could increase or decrease. Another benefit of a HELOC is the interest paid is tax deductible.

HELOCs are good loans, but not everyone will qualify. Borrowers will need equity in their home and be able to show steady income and a good credit score. Consider carefully whether the payment fits the budget before you decide whether a HELOC is right for you.

7. Personal Loans from Family or Friends

A generous and helpful family member or friend could offer to help by providing a personal loan. This can be beneficial because a family member may not charge interest or ask for your credit score and may be willing to help without a lot of conditions.

But tread this sentence carefully: Borrowing from friends and family has great risks if you do not repay the loan. Stiffing a family member or friend leads to personal complications and emotional pain for the generous person who was willing to risk losing money.

The main rule on borrowing this way: Be absolutely sure you can repay the loan. Nobody wants Aunt Edna or Uncle Ernie cursing us under their breath.

8. Secure a Credit Card Cash Advance

Credit card companies will offer tempting cash advance options, but be sure to study the interest rate and terms of the agreement for taking cash advances.

Many cards offer introductory 0% interest rate on cash advances for an “introductory period”, and this can be a good borrowing option. Basically, you are repaying an old debt at zero interest.

However, … and this is vital … be sure to repay the credit card advance in full and on time. With many card companies, missing a payment or not paying within the agreed time means all interest that had been waived to zero accelerates. Which means instead of a 0% interest rate, you’ll have 18% (or more) on the entire amount of the loan

Those credit cards that do not offer 0% usually have higher interest rates for a credit card cash advance, some as high as 27%. That rate should scare anyone away from borrowing from a credit card company, whose sole goal is to make money for themselves, even if it means hardship for you.

9. Cash Advance Loan

These loans are best for those with steady income yet are in need of immediate cash. Many of these loans come through apps, which offer between $20 and $500 against your next paycheck. The loan must be repaid when you are paid. Small fees are charged, and gratuities (tips) are encouraged.

This approach may help, but it’s not wise to continually rely on them. If you are doing so, it’s best to honestly assess your budget (see upcoming on credit counseling) and see where you can start cutting spending to avoid constantly taking out this kind of loan

10. Get a Paycheck Advance From Your Employer

Some employers are willing to provide cash via an advance on your paycheck. The limit for this kind of borrowing typically is $1,000. It’s vital to keep in mind that the money you receive in the advance will be deducted from your next paycheck.

The good news about that is you can receive cash in a hurry, if you need it.  The bad thing is the next paycheck will be reduced, so it’s important to budget accordingly. Keep in mind that the employer may provide the advance on a debit card and not all institutions accept debit card payments of this kind.

11. Peer-To-Peer Loans or Lending Circles

Peer-to-peer lending (P2P) takes place through websites. Individuals provide money and the interest rates are negotiable. This is a good way to borrow without going through the steps required by a bank or credit union.

Generally, this lending requires qualification on a P2P site, which may lead to a credit score check. If the application is approved, different lenders assess your qualifications and one or more may make the loan. You then must pay the loan back as agreed.

Because individuals are making the loans, some who would not qualify with a bank could qualify with P2P. However, many P2P lenders charge higher fees than banks or credit unions – and some origination fees could be as high as 8%. Interest rates on P2P may also be higher than banks. Lenders aren’t doing this for charity.

12. Get a Side Hustle

The gig economy took off during the pandemic, and numerous options remain to make extra money. Example: One father of a soon-to-be college student partnered with his daughter to deliver meals via Door Dash. He kept track of the pickup and delivery locations, she drove and delivered the food. In the end, she made a little more than $20 per hour.

One of the top benefits of working this kind of “job” is it provides instant cash. Some of the best side hustles include delivering meals from a restaurant, food from a grocery store or tutoring through various online sites or apps.

Another benefit: You do it when you want, and don’t do it if you want a break. Taxes must be paid on this self-employment income, so plan accordingly. But the freedom and flexibility make side hustles a good way to supplement any regular income you may have.

How Credit Counseling Can Help You

Financial challenges can be overwhelming, which is why some people may turn to a solution like a payday loan. But a solution that causes more problems than it solves is not really a solution at all.

That’s why it would be wise to seek long-term counseling and financial help from experts. Debt and credit counseling through a nonprofit agency like InCharge Debt Solutions could lead to an optimal solution. The counseling is free, and the organization is bound by law to offer the best advice for each individual situation.

Counseling can take place over the phone, where a counselor will assess each individual’s financial situation and come up with a plan to solve the issue. A debt management program, for instance, would address credit card debt by reducing the interest rate on all credit card debt to a more manageable number. Single monthly payments are reduced to an affordable level, and eventually eliminates the debt.

Other options could apply to each individual situation, and it’s the job of the credit counselor to wade through the complexities and find a solution.

It’s merely common sense when facing financial challenges to talk with an unbiased and professional voice. Credit counseling is a logical first step.