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Consider These Payday Loan Alternatives

Payday loans are some of the most expensive loans available with annual percentage rates of 400 percent or more.

If you are short on cash and thinking about applying for a payday loan, you need to know about payday loan alternatives that are less expensive and less detrimental to your finances. Payday loans are short-term unsecured loans. The borrower takes out a loan and promises to pay it back with significant interest after a short time, usually about two weeks after the initial loan. The lender is also given permission to deposit a check or withdraw from an account if the borrower does not return to pay the balance in person.

Using a credit card and withdrawing from an emergency fund are always better choices than payday loans because these loans are some of the most harmful loans borrowers can take. Here’s why you should avoid payday loans and what you can do instead.

Payday Loans Are Extremely Expensive

Payday loans charge very high interest rates, as the Consumer Financial Protection Bureau notes. The annual percentage rate for one of these loans can be 400 percent or higher. That makes these loans costly even if the full amount is paid on time. When the borrower is not able to pay the loan promptly, the effects are much worse. Not only does the interest pile up, but payday lenders will attempt to withdraw the money from the borrower’s account whether or not the money is there. Thus, a borrower who cannot return the full sum is hit with overdraft fees from their bank too.

Unfortunately, someone applying for a payday loan will often be unable to pay it back immediately and will end up owing a large amount in interest and fees. That is because a borrower with no emergency savings or access to credit through other means—including credit cards—is in financial distress. Such financial crises rarely resolve themselves within a single pay period. Payday loans only make the situation worse by adding to a borrower’s debts. You should consider the following payday loan alternatives if you find yourself in this situation.

Talk to Your Creditors

Let your creditors know that you do not have money right now and that you can pay them on the date of your next paycheck. Some creditors, such as utility companies, routinely set up payment plans and will be willing to work with you. Others may charge you late fees and other penalties, but the fact is that delaying payment to creditors generally does not result in such severe financial harm as a payday loan.

Apply for a Loan from a Credit Union

Credit unions offer short-term loans at lower interest rates than payday lenders. Bankrate notes that when you take out a loan, the credit union may use a small portion of the loan to set up a savings account for you. This helps you get started building an emergency fund. If you continue adding to this account once you have paid back your loan, you may be able to accumulate enough money in savings that you can draw on this reserve in future emergencies. Then you will not need to rely on loans between paychecks.

See a Credit Counselor

A non-profit credit counselor can negotiate on your behalf with creditors, potentially giving you lower interest rates or additional time to pay your debts. Using this route can take away some of the financial strain that is causing you to seek short-term loans. Just as importantly, a credit counselor will help you budget and develop a plan to manage your debts. Doing so may help you avoid seeking payday loans in the future.

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