When you’re strapped for cash, the payday loan promise of rapid money with no hassle can seem like an attractive option. But is it your only option?
According to a latest survey by private finance comparison site Finder, 14 percent of respondents said they would turn to payday loans over credit cards, individual loans or friends and family in a financial pinch.
“Unfortunately, the brief loan terms and extraordinarily high interest rates typical of these types of loans means many people get stuck in a cycle of needing to continually borrow to stay afloat,” says Jennifer McDermott, Finder’s communications manager and consumer advocate.
Indeed, the ease with which borrowers can get their palms on funds to float them to their next paycheck takes a financial toll. Research from the Pew Charitable Trusts finds the average American payday loan customer spends five months of the year in debt and pays $520 in interest and fees.
But payday loans don’t just influence low-income Americans. “High earners are also remarkably susceptible, with 20.6 percent of those earning over $100,000 admitting they would turn to a payday loan,” says McDermott.
The good news is that if you do find yourself in a financial predicament bondage, you can borrow money without becoming another victim of predatory payday loan practices. Here are seven alternatives to consider.
Before you make the leap to taking out a fresh loan, see if there’s a way to make your current situation more manageable.
For example, if a looming credit card or other loan payment is jeopardizing your capability to pay for basic expenses, see if you can work out a deal. “If you’re having trouble making your monthly payments, call your lender to ask for more time,” suggests Natasha Rachel Smith, consumer affairs pro at rebate website TopCashback. “You’d be astonished how willing they are to work with you on your payment schedule. … It pays to be see-through.”
While banks might have a reputation for crimson gauze and slow processes, you shouldn’t pass up your local financial institution when in a pinch. If you need money for a specific purpose, a individual loan could be a much cheaper alternative to a payday loan.
Smith recommends you consider traditional options such as borrowing from a bank or a local credit union. Often, community financial institutions have more lithe underwriting standards and lower interest rates than national banks. Plus, they are usually more willing to help out local residents and existing customers.
But you aren’t limited to brick-and-mortar institutions. Online lenders such as SoFi and Earnest permit you to see what rates and terms you qualify for without performing a hard credit check, and can fund your bank account within a few days if you’re approved.
Payday Alternative Loan (PAL)
Credit unions, which are member-owned financial not-for-profits, are all guided by the philosophy of “people helping people.” That ethos is evident in the availability of payday alternative loans (PALs), short-term loans suggested by credit unions 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. Keep in mind that 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.
Credit Card Cash Advance
Relying on a credit card cash advance is never a cheap option. Most issuers will charge a percentage of the advance as a fee, usually around Five percent, according to creditcards.com, with a minimum of $Five to $Ten.
“While admittedly another high APR loan option, if in a financial pinch, the fees and terms might be better than those suggested by a payday loan,” explains McDermott. The key is to pay off the advance right away, before you begin racking up interest on the balance. If you permit the balance to remain month over month, your short-term loan could spiral into a long-term debt problem.
If you’re comfy admitting your money issues to your boss, an advance on your paycheck might be the response to your short-term cash flow problem. Not all companies suggest these types of loans, and the terms vary. But it’s crucial you understand that it is, in fact, a real loan that you need to pay back according to the agreed upon schedule.
To inquire about an advance on your paycheck, either talk to your boss directly or go to your human resources department. While ideally, your employer wouldn’t be too involved in your private life, it’s best to be ready with an explanation as to what the money’s for and why you need it so urgently. Otherwise, your boss is left to wonder if there’s an underlying private issue that could someday influence your work spectacle, such as a gambling addiction.
It’s possible to tap into another workplace resource without counting on your boss’s approval: your 401(k). Albeit traditional advice would have you run for the hills before taking money out of your retirement account, it is actually one of the most cost-effective options. In fact, according to Investopedia, a 401(k) loan should be one of the very first options you consider to address a short-term, but serious need for liquidity.
Borrowing against your 401(k) doesn’t incur any taxes, so long as you go after all the rules. It also doesn’t require a credit check. And the interest? You pay it back to your own account. As long as you pay back the loan within about a year, the influence on your long-term gains should be minimal.
Family or Friends
Ultimately, 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.
“While not everyone has access to friends or family with money to loan, if you do, gulping that pride and asking for the loan may be a better option [than a payday loan],” says McDermott. The best part? “Often, this type of individual loan has the advantage of no interest.”
Again, this is going to depend on the type of relationship you have with this person and how much trust there is inbetween you. It could be wise to suggest to pay back the loan with interest if you want to display good faith that you plan on paying it back.
Keep in mind that this option might be the most financially advantageous, but it can also be the most tricky to navigate. Borrowing money from a friend turns a private relationship into a business one — you need to be comfy 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.
Of course, borrowing money last-minute isn’t ideal. But sometimes things happen that are out of your control. If you have to borrow money, borrow brainy and avoid the unnecessary, sky-high costs of a payday loan — it’s possible.