7 Alternatives to Consider Before Taking Out a Payday Loan

There are times when you need cash, and you need it fast. In this situation, many people consider taking out a payday loan. But is this really your only option? Here, we explain the pitfalls of these notoriously expensive loans and provide some less onerous alternatives.

The term “payday loan” usually refers to a short-term loan of $500 or less. It usually must be repaid all at once, with a single payment, within two to four weeks of the date of the loan. For most borrowers, this means paying it back out of their next paycheck or Social Security check – hence, the name payday loan.¹

But the fees typically associated with payday loans are very high, and the loan terms can be forbidding – APRs can reach as high as 400%, according to the Consumer Financial Protection Bureau (CFPB).² As a result, many states place restrictions on the amount that can be borrowed and the size of the fees that the lender can charge, or they prohibit payday loans entirely. 

Where they’re legal, payday loans are very easy to get. More often than not, all you need to do is show some recent pay stubs or other proof of income; the lender might not even check your credit score. To repay the loan, you’ll likely need to write a post-dated check for the full loan amount, including fees, or you’ll need to authorize the lender to electronically debit the funds from your bank account. If you don’t repay the loan on or before the due date, the lender can then cash the previously written check or withdraw money from your account.

But if you’re faced with an emergency and need cash in a hurry, are there any other options besides turning to a payday lender? There are indeed, and most of them come with a much lower price tag. 

Here are seven common – and less expensive – alternatives.

Some federal credit unions offer a less costly option known as a “payday alternative loan.” With this this type of loan, you can borrow up to $1,000 for anywhere from one to six months – but you must have been a member of the federal credit union for at least one month.³ The interest rate is capped at 28%, which is still high compared to other lending options, but it’s much lower than what you would typically expect to shell out for a payday loan.⁴

If you need to buy an essential item but can’t afford to pay for it outright, many retailers will allow you to make the purchase under a buy now, pay later payment plan. These plans divide the payments into equal installments, sometimes with no interest – and not all plans require a full credit check.

Depending on how much you earn, you may qualify for a financial assistance program. Some programs offer rental assistance, while others are geared to help you pay for food and other expenses. To find out what programs are available in your area, check with your local library or chamber of commerce – they can be a useful and cost-effective alternative to payday loans.

If you have a credit card, you may be able to take out a cash advance. But there are some stipulations. Cash advance limits are often capped at a lower amount than your card’s full credit limit, you will likely have to pay a cash advance fee, and cash advances tend to have higher interest rates than typical credit card transactions. Still, the fee and the rate combined will likely be much lower than what a payday lender would charge you – just be sure to repay the balance as quickly as possible, otherwise interest charges will continue to accrue.

Some employers are willing to give you an interest-free advance on your next paycheck, eliminating the need for a payday loan. Some larger companies may even provide an option for a paycheck advance on their payroll sites, so you can request one without having to inform your supervisor. Check your employee handbook or contact your HR department to find out more about this payday loan alternative.

Another way to avoid taking out a payday loan is to ask to borrow what you need from a friend or relative. This can be awkward, but if you have people in your life to whom you can turn for financial help, you could potentially save hundreds of dollars in interest and fees. If you do go this route, treat it seriously and specify how you will pay it back, when you get the loan.