With COVID-19 slowing the economy and a record number of unemployment claims, many Americans are strapped for cash. Payday loans are advertised as a quick solution to your temporary money woes. Yet the only “good” thing about a payday loan is the fact that you can get the cash quickly.
Everything else is downhill from there. The average annual percentage rate (APR) on a payday loan can soar as high as nearly 400% according to the Consumer Financial Protection Bureau (CFPB).
For comparison, credit cards have an average interest rate of just over 15% according to the Federal Reserve and typically top out at about a 30% APR. Yes, paying back that payday loan will typically cost you more than your credit card with the highest APR.
Payday loans are costly and you should avoid them whenever possible. But what else can you do when you need quick cash? In this post, you’ll discover eight payday loan alternatives worth considering.
8 Payday Loan Alternatives When You Need Fast Cash
Whether you're worried that you won't be able to make your mortgage or rent payment on time or you're facing an unexpected medical expense, there are many reasons why you may need to get your hands on cash quickly.
But before you rush off to your nearest payday lender, consider whether any of these payday loan alternatives may be a more affordable option.
1. Ask For A Due Date Extension
With the current pandemic, many companies, landlords and utility companies have offered their customers and tenants an extension for making due payments. The federal government and many states have imposed various moratoriums on foreclosures, evictions, and utility terminations. Learn your rights if you've experienced a financial hardship in connection with the coronavirus crisis.
Even if you're creditor or landlord isn't required to allow an extension on your bills, you can still ask for one. People and companies can be surprisingly understanding - especially during a crisis. Receiving an extension will give you time to get your paycheck and pay directly from it instead of receiving a payday loan with exorbitant fees.
2. Negotiate A Payment Plan
If your creditor is not willing to grant you an extension, ask if they will accept a payment plan. Credit card and utility companies have been offering these for years. But it's not a provision that you'll see advertised.
If you can't make your full payment by the date, get on the phone ahead of time and explain your situation to a customer service representative. They may be able to help create a plan to make manageable payments over time. Creditors are usually more than happy to receive at least some payment rather than nothing at all.
If you're trying to negotiate a repayment plan for credit card debt, the CFPB says that talking to your creditors directly, rather than using a debt settlement company, could be just as effective while also saving you money n fees. But if you do feel like you need professional help, consider working with a government-approved credit counselor or an attorney.
Related: How To Setup An IRS Payment Plan
3. Take Advantage Of Special Programs
If you’re a student, veteran, fall into a particular income bracket, or meet some other kind of special requirements, you may be able to take advantage of special debt relief programs created just for people like you.
For example, the Servicemembers Civil Relief Act (SCRA) provides many benefits to active-duty military members including interest rate caps and broad protections against eviction or foreclosure. Learn more about the Servicemembers Civil Relief Act (SCRA).
Students may also qualify for programs that can can reduce or suspend payments while they're enrolled in a qualifying institution. Again, companies may not voluntarily inform you about these programs. So call their customer service desk to find out what they have to offer.
Note: To relieve the financial burden caused by COVID-19, federal student loan payments and interest accrual has been paused until September 30, 2020.
4. Apply For A Personal Loan From Your Bank Or Credit Union
Taking out a personal loan from your bank could be another one of your payday loan alternatives. Personal loans do come with an interest rate. However, that rate will likely be much lower than what you'd pay with a payday loan. Currently, the average interest rate on 24-month personal loans is under 10%.
Your brick and mortar bank is not the only option for getting a personal loan. Online lenders like SoFi also offer personal loans. Depending on the lender that you choose, a personal loan can take a while - up to a few weeks - to get approved. However, the top personal loan lenders are able to offer much faster turnaround times.
Also, if you're a member of a credit union, you may be able to apply for a Payday Alternative Loan (PAL). PALs are $200 to $1,000 loans with terms ranging from 1 to 6 month. These loans cannot charge more than $20 in fees or an interest rate higher than 28%.
5. Ask For A Paycheck Advance
A paycheck advance is another payday loan alternative you can take advantage of. For this option, you'll need to ask your boss about getting a portion or all of your paycheck earlier than the normal pay day.
It may require that you get approval from upper management at your employer or your director of human resources. However if you're approved, you may be able to get the funds you need before your bills are due.
The wonderful thing about a paycheck advance is that you don’t accrue interest or need to pay hefty fees. It's the same paycheck you always receive for the work you do at your place of employment. You're just getting it a few days earlier than usual.
6. Borrow From Your 401k
Sticking with work-related payday loan alternatives, you could consider taking out a 401k loan. These loans come with a couple of key benefits that can make them an attractive choice.
First, you won't be working with a lender and won't need pass a credit check to get approved. And, second, the "interest" on the loan is paid to yourself. So, as long as you pay it back on time, a 401k loan literally won't cost you a penny out-of-pocket.
However, there are also dangers to consider. First, your loan becomes due when you lose or leave a job. So it's not a good option if you're currently dealing with job instability. Second, if you don't repay your loan by the time that its due (usually five years), you’ll have to pay income tax and a 10% penalty on the money withdrawn.
7. Take Out A Credit Card Cash Advance
A credit card cash advance can be one of the more expensive payday loan alternatives. First, you'll need to pay a cash advance fee, often 3% to 5% of the amount. Second, your credit card company may charge a higher interest rate for cash advances than regular card purchases.
Third, there is generally no grace period on a credit card cash advances. Interest will begin to accrue immediately. If you take out a credit card cash advance, you'll want to pay it back quickly to minimize fees and interest. And if you're able to do so, it could still be much cheaper than a payday loan.
8. Ask Friends And Family for Help
Too shy to ask friends and family for help? Sometimes, it may be necessary to swallow your pride and ask people you trust for assistance.
This is definitely an area that you'll want to tread carefully. Yes, your friends and family may not charge you interest rates or fees. But families and relationships can be destroyed over the failure of a borrower to hold up their end of an agreement.
The last thing you want is for your financial difficulties to also cause damage to your valued personal relationships. In order to maintain trust, it's important to promptly pay back what you borrowed at an agreed point in time or as soon as your financial situation improves.
If you find that you are consistently strapped for cash, it may be time to talk to a credit counselor or money coach. These financial professionals can provide a safe and non-judgmental space where you can learn the skills you'll need to make better money decisions.
Finally, sometimes earning more money is the best way to handle unexpected expenses or mounting bills.
Many side hustles can yield money in just a few days and others can be a long-term solution for increasing your monthly income.
Selling items on platforms like Craigslist, Facebook Marketplace or OfferUp could yield a quick return and get you out in a pinch. Or if you're lookig for a longer-term side hustle idea, you may want to launch a freelance business. To get your creativity flowing, check out the 15 best side hustles you can start earning with now.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.