Personal Finance

11 Smarter Alternatives to Payday Loans

Businessman handing over $100 bills

Payday loans are tempting when you need quick cash. They're easy to get, and you receive your money the next day. But the high interest rates and short repayment terms mean that, more often than not, you're digging yourself into a deeper hole. Many borrowers find themselves unable to keep up with the payments and then they're charged additional fees, making it almost impossible to pay off the debt. This can hurt your credit score, which in turn impacts your ability to get other types of loans in the future.

If you find yourself in dire need of extra cash, we recommend staying away from payday loans. Try one of these alternatives instead.

Businessman handing over $100 bills

Image source: Getty Images.

1. Look for ways to increase your income

Consider selling any items you don't need for extra cash. If you're an hourly employee, you can also pick up some extra shifts and reap the benefits of overtime pay. Or think about starting a side gig. If you can find some way to make the extra cash on your own, then you don't have to worry about taking on any debt at all.

2. Negotiate a payment plan with your creditor

Creditors are often happy to work with you if you reach out to them and ask for more manageable repayment terms. For example, say you've taken out a $15,000 car loan from the bank and are having trouble making the $300 monthly payments. The bank may be willing to let you defer payment for a month or two until you get back on your feet. Or it may enable you to refinance the loan so you only pay $200 per month over a longer term.

Whether or not the lender will allow this depends on its policies and your history of repayment. If you've been consistently late on your payments for several months, you may find the lender less accommodating. That's why it's a good idea to reach out as soon as you begin to have trouble making the payments.

3. Tap into your emergency fund

Hopefully, you maintain an emergency fund so you don't need to take out loans when unexpected expenses arise. If you have enough in your savings, use it. It will save you money in the long run, because any money you pay back to it is yours to keep, and you won't lose anything in interest.

4. Borrow from friends or family

If your family and friends have any money to lend you and feel confident that you can pay it back, this is a smart way to go. Most family members won't charge you any interest, and they're more willing to be flexible with the repayment terms.

Be sure to discuss the details of the loan carefully beforehand and make sure both parties agree on the repayment terms, including any interest to be paid. You should also talk about what the consequences will be if you fail to pay back the loan within the agreed-upon time. It's a good idea to get a copy of these details in writing so that both of you can refer back to it later.

5. Ask for an advance from your employer

Not all companies allow employees to take an advance on their salaries, so check your company's policies. If this is an option for you, it's worth considering because you won't have to pay anything back. But keep in mind that you won't get your full paycheck at your next pay period.

6. Take out a personal loan

A personal loan is a viable alternative if you have good credit and you need to borrow a large amount (most lenders require a personal loan to be at least $500). The APRs can still be steep, often ranging from 10% to 30%, but this is still a bargain compared to the outrageous 400% APR some payday lenders charge. Plus, personal loans often give you anywhere from six months to five years to pay them back, depending on the size of the loan.

7. Take out a payday alternative loan (PAL)

A payday alternative loan is worth considering if you need to borrow $1,000 or less. PALs are offered by federal credit unions, and like payday loans, they're usually easy to get approved for, regardless of credit, and you get your money quickly. However, you must be a member of the credit union you're borrowing from for at least a month before you can apply for one. The maximum interest rate is 28%, and repayment terms range from one to six months.

8. Pay with a credit card

While this is not as risky as a payday loan, you'll want to be careful not to charge too much on your credit card, as this can become a slippery slope. Credit card interest rates are often high, so you should avoid this method unless you feel sure that you can pay back the debt quickly. Look for a credit card with an APR under 20% -- or, better yet, a 0% introductory APR so you have a window to make interest-free payments.

9. Borrow from your 401(k)

This strategy can come back to bite you, so it should only be used if you're borrowing a small amount and are confident that you can pay it back quickly. The advantage of borrowing against a 401(k) account is that, while you will have to pay it back with interest, that interest goes into your retirement account instead of a banker's pocket. Plus, you don't have to worry about being denied because of your credit.

But there are limitations on what you can borrow. The maximum amount you can take out is 1) the greater of $10,000 or 50% of the account's balance or 2) $50,000, whichever is less.

You must pay back any money you borrowed from your 401(k), with interest, within five years if you want to avoid being penalized. If you fail to pay back the amount owed during this time, then the outstanding amount will be considered a distribution. That means it will be subject to income tax, as well as a 10% early-withdrawal penalty if you're under age 59 1/2.

You can also borrow from your IRA if you have one, though this is a little more complicated.

10. Borrow from your life insurance policy

If you have a whole life insurance policy, you can take a loan from this as well. The advantage of doing this is that you have your entire life to pay back the loan. If you don't pay back the full amount, that's OK, but the missing amount will be subtracted from your death benefit. Any money you borrow from your whole life policy must be paid back with interest if you want to receive the full benefit, but the interest rates are generally more affordable than what a bank or credit card will charge you -- usually between 10% and 15%.

11. Consider credit counseling

Credit counseling won't get you the cash you need right away, but it can help you to get a better handle on your finances and pay back your existing debt so you don't end up owing even more. A credit counselor will look at your financial situation and work with you to devise a debt management plan so you can pay down your debts over time.

If you're interested in pursuing credit counseling, make sure you choose a reputable company. Do some research to see what options are out there, and then check with your state attorney general or consumer protection agency to verify that no complaints have been filed against them.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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