In an ideal world, all financial problems would be solved with a simple solution: make more money. Obviously, it’s never quite that simple in the real world.
While increasing your income should be part of any long-term strategy when you’re struggling to make ends meet, sometimes you need money right now. In this case, it’s tempting to apply for a payday loan just to keep yourself afloat.
Here’s why you shouldn’t do that — and where to look instead. Funding U does not necessarily recommend any specific payday alternatives, but we’ve put together enough information for you to make the decision on your own.
What are payday loans?
Payday loans are short-term loans, usually around $350, with extremely high interest rates, ranging from 129% APR to 591% APR depending on the state. The average borrower will pay $520 in fees just to borrow $375.
Payday loans are popular because they don’t require a credit check and will accept anyone who has a regular source of income. Unfortunately, most people who take out payday loans can’t repay them immediately and have to renew the loan, triggering another round of fees. Approximately 22% of borrowers renew their payday loans six times or more.
Payday Alternative Loans
Some credit unions offer payday alternative loans (PALs). These are like a hybrid of personal loans and traditional payday loans.
PALs range between $200 and $1,000 and have a term length between one and six months. Credit unions sometimes charge a $20 application fee. To be eligible for a PAL, you usually must have been a member of the credit union for at least a month.
The maximum interest rate on a PAL is 28%, much lower than a payday loan and similar to a personal loan. Borrowers are limited to taking out three PALs in a six-month period.
Credit unions usually report PALs to credit bureaus, so borrowers who repay theirs successfully can improve their credit.
Many credit unions that provide PALs also offer free financial literacy education to borrowers. This can help consumers learn strategies to avoid needing short-term cash from things like PALs and payday loans.
To become eligible for a PAL, you’ll have to join that specific credit union. This may come with a small application fee, usually around $15-$20.
Only credit unions that are part of the National Credit Union Administration (NCUA) offer PALs. You can find your nearest one through the NCUA website.
Personal Loans
If you need to borrow more money than what a payday alternative loan provides, look at personal loans. Personal loans have lower interest rates than payday loans and have a maximum APR of 36%.
The repayment term is usually between one to five years, and they have fixed monthly payments. Personal loan amounts generally range from $5,000 to $50,000, but this may depend on your credit history.
You can apply for a personal loan through a bank, online lender, or credit union. Apply for a few different lenders to find the lowest interest rate.
Cash Advance
Students who already have a credit card can use it to take out a cash advance. A cash advance is when you go to the ATM and use your credit card to withdraw money, much like you would with a debit card.
Most cards limit cash advances to 20% of the card’s available limit. If your card has a $5,000 limit, then the cash advance limit would be $1,000 or less.
Card providers charge a higher interest rate, an average of 23.68% APR, on cash advances than credit card purchases, so a cash advance should only be used if you need physical money.
Interest on a cash advance starts accruing immediately, whereas regular credit card transactions often have a grace period before interest begins accumulating.
Other Options
Taking out a loan isn’t your only solution and should be a last resort. Consider these less expensive alternatives first.
Call the Provider
If you’re looking for a loan to pay for bills like utilities, call the provider first and ask them for help. Many offer assistance programs for customers experiencing financial hardship.
Even your landlord may be willing to let you pay rent late without charging a fee. Some auto lenders also allow payment deferrals in exchange for a small fee.
Always call and ask before you’ve missed a payment. Service providers are typically more willing to work with customers who are proactive and upfront about their situation.
Contact Your University
Some colleges offer emergency financial assistance for students. Contact your financial aid office and academic advisor to learn what resources may be available.
Negotiate Medical Bills
Before taking out a loan to pay for medical expenses, contact the provider and ask about payment plans or financial assistance options.
Many hospitals and healthcare providers offer reduced-cost programs or extended payment arrangements for qualifying patients.
Start a Crowdfunding Campaign
If you can’t afford to repay a loan and need money quickly, a crowdfunding campaign may be worth considering.
Platforms like GoFundMe allow you to share your story and request support from friends, family, and your community.
If privacy is a concern, creating a custom PayPal payment link can be a more discreet way to request assistance.
Borrow as Little as Possible
Whatever option you choose, try to borrow only what you absolutely need. The more you borrow, the more you’ll have to repay.
Research your options carefully and choose the least expensive solution available. Even a small reduction in interest can result in significant savings over time.