9 Payday Loan Alternatives: Avoid the Debt Trap


If you’ve ever been strapped for cash and need money quickly, you may have considered taking out a payday loan. Whether you’ve seen a corner store offering loans with no credit checks or an online lender boasting fast funding times, be sure to look before you leap.

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Even though payday loans come with several benefits, there are significant disadvantages to be aware of. Therefore, it’s worth considering other options to meet your financial needs. So, what kind of alternatives are there to payday loans? Keep reading to find out.

What is a payday loan?

Before diving into alternatives, understand what is involved with a payday loan. In short, it’s a small cash advance borrowed for a short period of time. The most common loan terms are two weeks because that’s how long it takes most people to receive their next paycheck.

Payday loans cover short-term needs like paying rent when your budget falls short or when an unexpected expense like a car repair pops up. Perhaps most appealing about them is there are very few requirements for approval, and most lenders don’t run a credit check.

Payday Loan Requirements

Consequently, you can have bad credit — or none at all — and still qualify. However, you will need to have a checking account and provide the lender with a check or account number in most cases.

The lender then automatically debits the amount you owe on the loan’s due date, plus whatever fees or interest are included. This helps protect the lender from losing out on money. If you don’t have the money in your account, you have the option to roll it into another term, along with another set of fees.

Payday Loan Debt Cycle

This is where payday loans get tricky. Many people quickly get stuck in a cycle of debt because they can’t pay the original amount owed. On top of that, they keep accumulating expensive fees every time they renew the loan.

What likely started as a loan to bridge a short-term financial need can quickly snowball into a long-term burden of debt. So be sure to have a solid repayment plan if you decide to take out a payday loan. Even better, consider using an alternative financing method.

Are payday loans bad?

Payday loans are expensive, and the way they’re structured can be deceptive. In the United States, each state has different rules about how much interest can be charged on a payday loan. But in most situations, you’ll typically pay somewhere between $10 and $30 for every $100 you borrow.

Usually, this amount needs to be paid back in two weeks. You might be thinking, “$20 isn’t much money to pay to get the cash I need to fix my car!” But let’s look at things in a different light.

High Interest Rates

Let’s say you borrow $300 to get your car worked on, and you’re charged $30 ($10 for each $100 borrowed). Your APR is actually more than 260% because the amount of interest you’re paying is extraordinarily high compared to the length of time for repayment and the loan amount.

Think about your credit card with the highest annual percentage rate (APR). No matter how high it is, it’s nowhere near 260%! When you put things into perspective, you can see that they are very costly.

Payday Loan Fees

Plus, that fee only applies to a single two-week repayment period. In actuality, most people are likely to roll over their loan, meaning they can’t repay the money by the original due date. A 2014 study from the Consumer Financial Protection Bureau discovered that 80% of payday loan borrowers renewed their loan after 14 days.

That leads to more fees and interest growing each time the loan is renewed and an extremely dangerous (and expensive) cycle to get caught in.

Credit History

Payday lenders typically do not report your payment history to the three major credit bureaus, so you miss an opportunity to build your credit history. With personal loans and credit cards, your payment usually is reported to the credit bureaus.

What is the best payday loan alternative?

There are many alternatives. Some are quick, some take more preparation time, and some require varying degrees of positive credit. But within this list, you’re sure to find something to help avoid getting a payday loan.

1. Tap Into Your Emergency Savings Fund

The best way to avoid having to take out a loan is to have a savings cushion for emergencies. This might not be an immediate solution to your problems, but it can be a game-changer in the long run. So start by saving up $1,000 for your emergency fund.

As an exercise in changing your perception of the definition of an emergency, keep the money in a bank account that’s difficult to get to. Then, don’t activate your online account. To get the money, you’ll need to make an inconvenient drive, causing you to think twice about whether you truly need it.

Anytime you use some or all of your savings, you should immediately begin repaying yourself. That way, you always have that buffer to hedge against a rainy day.

Once that’s taken care of, start building an even bigger financial safety net. This should typically amount to three to six months of your expenses. So if you lose your job or have hours cut back, you can still meet all of your financial obligations until your situation gets better.

2. Explore the Benefits of a Payday Alternative Loan (PAL)

A Payday Alternative Loan (PAL) is a type of small, short-term loan offered by certain federal credit unions. It’s designed to provide an alternative to high-cost payday loans.

PALs typically have lower interest rates and fees than payday loans, and the terms are more flexible. They are available to members of participating credit unions who meet certain eligibility requirements.

According to the guidelines set by the NCUA, all Payday Alternative Loans (PALs) must fall within the following parameters:

  • Loan amounts must be between $200 and $1,000
  • Borrowers must be a member of the federal credit union for at least one month
  • Loan terms are one to six months
  • An application fee of no more than $20 to cover processing costs
  • No ability to roll over the loan

PALs can be used for a variety of purposes, including covering emergency expenses, paying bills, or making small purchases. They are generally repaid over a period of several months, with the borrower making regular payments to the credit union.

3. Take Out a Personal Loan

Online lenders have made it extremely easy to access funds quickly through personal loans. You can even find personal loans for bad credit. Unlike payday loans, these unsecured loans have a long term with consistent installment payments. They also have more reasonable collateral requirements, renewal limits, and only a single penalty fee for paying late.

Personal installment loans are much more consumer-friendly than payday loans. Plus, they give you a clear path to repayment since you know how much and for how long you’ll be making payments. On the other hand, payday loans are likely to catch you in an ongoing cycle of debt.

If you have trouble qualifying for a personal loan on your own, consider adding a cosigner. This allows you to add another person’s credit score and income to the loan application. It can potentially increase your chances of qualifying and with better terms. Just remember that any late payments and defaults you make on the loan will also impact your cosigner’s credit score.

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4. Use a Credit Card

If you have a credit card that isn’t maxed out, consider using it for your financial emergency instead of a payday loan. Even if the APR is high, it’s unlikely to be higher than a payday loan, especially if you need more than two weeks to repay it.

If you don’t have a credit card you can use, consider applying for a new one. Online applications make the process relatively quick these days, and there are plenty of options for all credit types.

With bad credit, you’ll likely pay higher interest rates, but again, it’s still a better option. Most credit cards offer cash advances. However, the interest rate is higher than standard charges, but you can avoid it altogether by paying the balance before your next billing cycle.

5. Talk to Your Creditor

When you’re considering a loan to help pay off existing credit card debt, you should first talk directly to your bank or credit union. Explain your issues to them and see if they can help you out.

Credit card issuers may be able to give you a brief reprieve from making payments if your financial hardship is temporary. Or they could consolidate your debt to lengthen the repayment period and lower your monthly payments. Of course, you’ll end up paying more interest compared to the original payoff plan. However, you don’t have to worry about the added risk and expense of a payday loan.

6. Borrow Money from Friends and Family

Assuming you need cash now and can’t wait to save the money, consider asking friends or family. While this might not be the best option for some people, it does help you avoid expensive fees and potential damage to your credit.

Make sure you can repay the loan on time so that you don’t end up damaging a personal relationship. But if you and your friend or family member are both comfortable with the situation, it can be a low-cost or even free way to make ends meet.

Just be sure to draw up an agreement so that both of your expectations are on the same page. For example, will you pay interest on top of the amount owed? Does your friend expect the money to be repaid within a certain timeframe? Have a frank discussion, so no one is surprised. Be honest with your friend and yourself about how realistic the proposed payment plan is.

7. Look for Community Resources

Many local communities have financial resources available. You just need to ask. Check with your church or other community groups to see if any assistance is available. You can also check for government resources that are aimed to help people through financial hardships.

The SNAP program (similar to food stamps) and WIC both help to afford groceries each month so you can spend your money on other obligations. You can also search for help from the government’s Low Income Home Energy Assistance Program. They can possibly help you lower your heating and cooling bills throughout the year.

8. Start a Side Hustle

One way to avoid taking out a loan is to sell some of your things or earn extra money, whether through a second job or side hustle. This idea can also help you put money in your bank account when you’re first getting started.

You probably won’t make millions going through your attic, but even just pulling together a few dollars here and there can help. If you have a marketable service, you can also advertise online and get friends to help spread the word. Alternatively, you can ask for extra hours at work to help fill a short-term financial need.

9. Contact a Credit Counselor

When you’re not sure how to get control over your finances and your life, it’s time to get help. A consumer counseling agency can help you review your financial situation and explore your options for moving forward.

This is especially helpful if you’re overwhelmed with debt and have trouble making your payments. Talk to a professional to develop a debt management plan that works for you.

Payday Loan Alternatives to Avoid

When exploring alternatives to payday loans, there are a few products worth avoiding. One is a title loan, where you use your vehicle title as collateral for a cash loan. But just imagine the trouble you’d run into if your car ended up being repossessed.

How would you get to work and pay your other bills? Unfortunately, this option invites far too many problems.

Bottom Line

Payday loans should only be used as a last resort. Whether you end up getting one or not, it’s wise to come up with a plan to get your finances on track. The first step is to build that emergency fund, whether it requires cutting back spending in certain areas or trying to earn more money.

It’s not easy, especially if you’re already working hard and living paycheck to paycheck. But if you find yourself with few options, it’s vital to develop a long-term solution to avoid the same situation further down the road.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.