7 Alternatives to Costly Payday Loans

Casey Bond
·8 min read

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 one?

The Center for Responsible Lending calls payday loans "predatory" -- for good reason. The ease with which borrowers can get their hands on funds to float them to their next paycheck often takes a severe financial toll. According to the CRL, the average annual percentage rate on a payday loan is a staggering 391%.

Payday loans are problematic due to their high interest rates, but renewals pose an even bigger danger. If you aren't able to pay back the loan by its due date, the Consumer Financial Protection Bureau warns that many states allow payday loans to roll over. In this case, you would only pay the fees owed on the loan, while the due date is extended. You would then be charged a renewal or rollover fee, plus a possible late fee, and still owe the original amount. This is what leads to a cycle of expensive debt.

The good news is payday advances aren't your only option if you're in a financial pinch. Here are 11 alternatives to consider.

Make a Payment Plan

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, your issuer might agree to lower your interest rate to help make your payments more manageable.

If you've been a good customer in the past, your lender will be more likely to accommodate your request. In any case, it's best to be upfront about your situation.

Get a Personal Loan

While banks might have a reputation for red tape and slow processes, you shouldn't pass up your local financial institution when you're 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.

"These are more of a traditional borrowing arrangement, structured in such a way that you're getting a sum of money to provide for something you need to buy or refinance, and you're going to have a repayment schedule," says Andy Laino, a financial planner with Prudential.

[Read: Best Personal Loans.]

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.

"Personal loans are best used for debt consolidation, for people who have major medical expenses, or they know they will have some home repairs at a fixed price," Laino says. "When you have more defined expenses or more defined projects, go with the personal loan."

Tap Your Home Equity Line of Credit

Homeowners may be eligible for a low-interest, tax-deductible line of credit, says Howard Dvorkin, a personal finance expert and chairman at Debt.com. "For those with a steady income, this can be a great way to access quick cash," he says. Average HELOC interest rates hover around 5%.

However, use extreme caution when leveraging your home for quick cash. "For those in financial trouble, tapping home equity puts their home at risk if they cannot repay their debt," Dvorkin says.

[Read: Best Home Equity Loans.]

Get a Payday Alternative Loan

Some credit unions offer payday alternative loans. These are 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 fairly high interest rates. Fortunately, PAL interest rates are capped at 28% by law.

Secure a 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 average APR on cash advances also sits at around 25%.

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 after month, your short-term loan could spiral into a long-term debt problem.

Get a Paycheck Advance From Your Employer

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. It's crucial you understand that the advance is, in fact, a real loan that you need to pay back according to the agreed-upon schedule.

Use a Paycheck Advance App

If you don't want to get your company involved in your financial situation, and you have a steady paycheck, you can go through an app instead. Companies such as Earnin and Brigit will front you a portion of your upcoming paycheck without any interest. Fees are limited, though some apps allow you to tip voluntarily.

Borrow From Your 401(k)

It's possible to tap into another workplace resource besides your paycheck: 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 your progress in growing a retirement nest egg.

[Read: 401(k) Mistakes to Avoid.]

Go to a Pawnshop

Pawnshops offer secured loans with no credit check or lengthy application process. You can receive cash on the spot by putting up an asset as collateral. Once you repay the loan and any fees by the agreed-upon due date, you get your collateral back. If you can't repay the loan on time, you lose whatever asset you pawned.

Keep in mind that the cost to borrow from a pawnshop varies widely. Interest rates range from 12% to 240%, depending on state law. There may also be storage and insurance costs included in the loan. The advantage is that if you can't pay it back, you can walk away without incurring new fees or a hit to your credit.

Use a Peer-to-Peer Lending Platform

Peer-to-peer lending can also help you secure quick cash by matching you with an investor via a lending platform like LendingClub or Prosper. Investors on these platforms can review the loans available and select which one they want to fund. In exchange, the investor charges interest. You may also need to pay a small loan origination fee.

Interest rates on P2P loans can be fairly low, especially if you have good credit. At LendingClub, the range is 10.68%-35.89% APR. The application process is usually a lot less complex than at a bank. P2P lending offers other advantages, too. "A peer investor may be more sympathetic than a traditional bank," Dvorkin says.

Ask 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. Keep in mind, however, that 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. Your loved ones should only lend what they can afford to lose.