There’s no shame in looking for a little extra financial help when you’re in need. The problem is, it’s not always easy to know what to look for. One solution that a lot of Americans look to is payday loans, with around 12 million Americans using payday loans each year[1]. So, if you’ve ever needed an injection of cash and thought about applying for a payday loan, you wouldn’t be alone.
While fast payday loans can be a relatively accessible borrowing option with sometimes a speedy application process, they’re not a type of personal loan that you should be applying for lightly. They can be tough to pay back on time and if you don’t approach things carefully, they may end up costing you more than you thought they would when all is said and done.
So, before you decide to submit an application, it’s important to understand what you’re applying for and what some of your other potential options are. In this article, we’re going to explore what a payday loan is, some reasons why you may want to look for an alternative, and what those potential alternatives are.
What is a Payday Loan?
Payday loans are short-term personal loans that are designed to help you take care of an immediate financial need. They’re generally considered to be small-dollar loans that come with high interest rates, relative to what you would be able to get if you have better credit, and if approved, you’ll get your money in the form of a lump sum. They get their name from the fact that you’ll typically be required to pay them off whenever you receive your next paycheck, whether that be in two weeks or even in a month.
While this can vary based on the state you live in, you can apply for payday loans online, or through a payday loan organization that has a storefront location. If you get approved, you might receive your funds in the form of a check or cash, or you could have it directly deposited into your bank account.
Why You May Want to Look for a Payday Loan Alternative
Before we dive into some of the potential payday loan alternatives out there, we should explore some of the general characteristics of payday loans that you may need to look out for:
- Cost: Like we said, payday loans are typically a fairly expensive borrowing option as their interest rates are generally higher compared to other kinds of products.
- Repayment: While the fact that payday loans are relatively easy to qualify for can be good news for people who may have a hard time getting approved for certain other types of personal loans, it also means that you need to be extra careful when applying. Once you add on the interest and/or fees that you’ll need to pay on top of the actual amount you borrowed, and then factor in the quick due date, these loans can be difficult for some people to repay on time.
- Potential debt cycle: Because these loans can sometimes be difficult to pay off on time, you may end up in a situation where you’ll need a new loan to pay back what you already owe. By taking out a high-interest loan to pay off another, you can find yourself sliding down a slippery slope into a debt cycle that can be hard to get out of.
As you can see, there can definitely be some things to look out for when it comes to applying for payday loans online or in person. That’s why it might be a good idea to explore some other options before making any sort of financial commitment.
3 Payday Loan Alternatives
Everyone’s financial situation is specific to them, so there’s no one-size-fits-all solution when you run into a financial hurdle. Because of this, it’s always important to get an idea of what’s out there to try and find something that’s a good fit for your situation. Here are three different borrowing options that may serve as payday loan alternatives.
1. Installment Loans
Like payday loans, a personal installment loan will come in the form of a lump sum. One of the main differences is that instead of paying back what you owe with interest and/or fees by your next pay date, your payments will be spread out over equal and pre-determined payments. The term of your loan can range from a couple of months to several years, depending on the type of installment loan and the financial institution that’s providing or servicing the loan.
If you feel like two weeks isn’t enough time to pay back your loan, an installment loan might be a more suitable solution to your cash flow problems. Spreading out your payments over a longer period of time may make it easier for you to repay, plus the scheduled and equal nature of your payments may make it easier to find room in your budget for these payments ahead of time.
2. A Personal Line of Credit
A line of credit has some significant differences from both payday loans and installment loans. Instead of getting your money in a lump sump, if you’re approved for a line of credit, you’ll be able to draw funds from a pre-determined credit limit. You can draw money up to your available credit whenever you need, assuming your account is in good standing.
A line of credit can be a useful financial safety net to have in place in case you run into an emergency expense and need a little financial boost. Instead of needing to apply for a relatively expensive short-term option like a payday loan, you can have a line of credit on standby.
Another benefit is that, generally speaking, you’ll have the option to make a minimum payment – a portion of the total amount you owe – on your line of credit in order to keep your account in good standing. This can be helpful when you can’t afford to pay back all of what you owe, but don’t want to face late payment penalties. It’s still important to keep in mind that you should pay off as much of your line of credit as you can, and avoid the option to only pay the minimum if possible. After all, the longer you put off these payments, the more interest will continue to build up.
3. Use your Credit Card
When you’re facing an emergency expense, turning to your credit card may be another option. However, you should only do this if you know you’ll be able to pay off what you’ve used on time, otherwise you could risk falling further and further into debt. But if you do manage to make your payments on time, you can avoid expensive interest charges altogether.
Often, credit cards come with a cash advance feature. If you’re considering using this as an alternative to a payday loan, make sure you understand the rates and cost of this type of cash advance. And you should also keep in mind that the interest on your cash advance will start to build right away, so do your best to pay it off as quickly as possible.
Other Alternatives to Payday Loans
If you need some money to help you handle an emergency and want to avoid applying for a loan altogether, here are a few options to explore first.
1. Use your Emergency Fund
Before borrowing money through any means, an emergency fund should be your first line of defense when it comes to dealing with a surprise expense. This is a specific savings account meant for just these occasions. The caveat is that you’ll need to plan ahead and start putting one together in order to see the benefits. Try to contribute to one regularly, even if it’s only a few dollars every week. Even if your fund isn’t big enough to take care of all your expenses, the next time you run into an emergency, it may be enough to help you avoid applying for a loan, such as a payday loan.
2. Reach Out to your Service Providers
If you’ve had to shell out to handle an emergency and anticipate having a hard time paying your regular bills, reach out to your service providers, such as your cell phone provider, to see if they’re willing to work with you to put together a payment plan. This can help to spread out your payments while avoiding late fees and any potential bad marks on your credit history.
3. Speak to your Employer
If you’re in need of extra money, ask your employer if you’re able to cash in on any vacation days you have left for the year. On top of this, you can also see if you can pick up extra shifts at work to give your next paycheck a boost and put that money towards your emergency expenses.
Look at Your Options Before Applying for Payday Loans
It’s hard to go through life without running into an emergency expense from time to time, so it’s important to understand your options when the time comes. While fast payday loans may be an option, they tend to come with relatively high fees and a short repayment period, making it difficult for some people to manage. So, before you apply for a payday loan, look for a payday loan alternative that might be better suited to your situation.
[1] https://www.mycreditsummit.com/payday-loan-debt-statistics/
