Payday loans may seem like your only option in an emergency, especially if you have bad credit. While a payday loan offers quick cash, it’s also one of the riskiest ways to borrow money, so it’s important to explore payday loan alternatives.
Payday loans are small, short-term loans that usually come due on your next payday. They’re usually for $500 or less and don’t require a credit check. But the interest rates are exorbitant, with an average annual percentage rate of 391%. Most lenders require you to give them either a post-dated check or access to your bank account for repayment.
If you can’t afford to repay your loan when it’s due, many lenders allow you to roll over the loan for an additional fee. Multiple rollovers could lead you to pay more in fees than you originally borrowed and leave you stuck in a cycle of debt.
9 payday loan alternatives to consider
These payday loan alternatives carry significantly lower APRs than regular payday loans. Most provide quick access to cash and are available even if you have bad credit (a credit score in the high 500s or lower).
Payday Alternative Loan from a credit union
Some federal credit unions offer Payday Alternative Loans, or PALs, which are loans of $200 to $2,000 with repayment terms of one to 12 months.
These small-dollar loans are among the most affordable payday loan alternatives. While many payday lenders charge APRs of nearly 400%, Payday Alternative Loans have a maximum APR of 28%, which may include an application fee that’s capped at $20.
You may need to be a credit union member for at least a month to be eligible. Each credit union can set additional approval requirements, but because PALs are meant to be a payday loan alternative, you may qualify if you have bad credit or a thin credit file.
You can only have up to three PALs within a six-month period. You can’t have more than one loan at a time or roll over the loan.
Small-dollar loans from a bank
Some major banks, including Bank of America, U.S. Bank, and Wells Fargo offer small-dollar loans to their existing customers. Typical amounts range from $100 to $1,000, and you’ll usually have at least three months to repay the loan. Though the bank may check your credit, approval is often based on your checking account history.
You’ll usually pay a flat fee for a small-dollar bank loan. For example, a U.S. Bank Simple Loan charges $6 for every $100 borrowed up to $1,000 and requires customers to repay the loan in three monthly installments. Though the APRs tend to be higher than typical personal loan rates, they’re still about 15 times cheaper than the average payday loan.
Personal loan for bad credit
While many lenders have a minimum credit score, some online lenders specialize in bad credit loans. These loans can range from a few hundred dollars to $50,000 and can have repayment terms as long as five years. However, bad credit loans may have APRs that can make repayment difficult and lead you to borrow more. Aim for a loan with an APR no higher than 36%, which is the maximum rate many personal finance experts say a loan can charge and still be considered affordable. Be especially cautious about no-credit-check loans, since they often carry rates in the triple digits.If you don’t qualify for a loan with an affordable APR, consider adding a co-signer or co-borrower to your application. You can also look into secured loans using an asset (like a car title) as collateral, but be aware that your lender can seize your property if you don’t make payments.You can get an advance on some or all of your paycheck if your employer offers earned wage access. Companies that offer this benefit partner with a service like Payactiv, DailyPay or One@Work to give you early access to your paycheck based on the hours you’ve already worked. You can get your funds in as little as one business day. Fees are usually just a few dollars, and sometimes these services are even free.You can also get early access to your paycheck through cash advance apps, but this option is riskier than employer-sponsored wage access. These apps often charge a subscription fee fast-funding fee and an optional tip, all of which can add up quickly. Unlike paycheck advances that are linked to your employer, cash advance apps usually require access to your bank account, which could cause you to overdraft.With a pawnshop loan, you take a valuable item (like jewelry or electronics) to a pawn broker and borrow money using your property as collateral. You can typically borrow 25% to 60% of your item’s assessed resale value. If you don’t repay the full amount when the loan comes due (usually within 30 to 90 days), the pawnshop sells your property.
Pawnshop loans are an expensive way to borrow money, with an average APR of 200%, but they’re still cheaper than most payday loans. One advantage, though, is that you’re not legally obligated to repay a pawnshop loan. If you don’t pay off your balance by the due date, the broker will sell your collateral, but you won’t be sued or have your account sent to debt collectors.
Still, due to the high cost and risk of losing your property, pawnshop loans should be reserved for emergencies when you don’t have a cheaper payday loan alternative.
🤓 Nerdy Tip
If you have an item that you don’t mind parting with, consider selling it to a third party instead of pawning it. Selling the item may take a bit more time, but you’ll likely fetch more than you would from a pawnshop loan. Some charities, nonprofits or church groups may be able to help out if you’re facing an emergency, like a large medical bill or you’re at risk of losing housing. NerdWallet’s quick-help tool can help find resources when you can’t pay bills. The 211 hotline can also connect you with local assistance.If you’re in a pinch, it may make sense to ask a family member (or friend) to borrow money. A family loan is often an informal arrangement. You and your loved one can work out the terms of the loan, including the amount and when you’ll repay it, and your family member might agree to not charge you interest.
Borrowing money from family can complicate the relationship, though. Be honest about why you need the money and what a realistic repayment timeline looks like. To avoid misunderstandings, it’s often helpful to put the details in a written agreement that you both sign.
🤓 Nerdy Tip
If a family loan exceeds $10,000, your loved one is generally required to report it to the IRS and charge you interest.
You may be able to work out a payment plan with your creditors if you can’t make your payment. If possible, reach out before you’ve missed a payment and explain your financial situation. Some credit card companies and lenders have hardship programs that let you temporarily skip or reduce payments, have late fees waived or lower your interest rate.
You’ll typically need to provide proof of hardship, and approval is on a case-by-case basis. Keep in mind that these programs are temporary and aren’t a long-term fix if you can’t afford your bills.
Finding ways to earn extra money is a good alternative to payday loans when you don’t want to take on extra debt. For example, you could drive for a ride-share or delivery service, find dog-walking gigs on Rover, list a spare bedroom on Airbnb or take on freelance work. Another option is to sell your gently used clothing or electronics for cash.
How to get out of payday loan debt
Getting out of payday loan debt can be challenging, but it’s not impossible. Here are some options to consider:
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Ask for an extension. Payday loans are typically due in a single payment, but you may be able to extend your loan into multiple installments, depending on your state’s law and the lender’s policy. An extended repayment plan may be free, or you may be charged a fee.
- Consolidate your payday loans. Payday loan consolidation is when you combine multiple payday loans into a single loan that you repay in monthly installments with a lower interest rate. To qualify you, lenders will consider factors like your credit score, income and existing debt. Consolidating payday loans is generally a good idea if you can lower your APR.
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Negotiate with your lender. You may be able to negotiate an agreement to pay less than you owe to your lender if you’re able to repay part of the loan. Though some companies offer to negotiate with lenders for a fee, you can contact your lender directly to work out an agreement. If your lender agrees to settle for less than you owe, be sure to get the details of the arrangement in writing before you make a payment.
- Get professional help. If you’re buried in debt or you consistently turn to payday loans to make ends meet, it may be time to seek professional guidance. A nonprofit credit counseling agency can help you budget and work out a plan to repay your debts. The National Foundation for Credit Counseling is a good place to start. If you owe more than you can realistically afford to repay, you may need to consult with a bankruptcy attorney.
Ways to avoid payday loans in the future
Even if you’ve turned to payday loans in the past, you can avoid them in the future by following these steps:
- Make a budget. Making a budget is key to avoiding payday loans. You can use NerdWallet’s budgeting template to tally your expenses and find a system that works for you.
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Start an emergency fund. Try to find some room in your budget to build an emergency fund. Even $10 a week will add up to $500 in less than a year, providing you with a valuable payday loan alternative in the future. Consider setting up automatic transfers to a savings account to make things easier.
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Join a credit union. Credit unions tend to have more flexible lending requirements than major banks. They’re more likely to work with members who have bad credit because they consider your membership history in addition to credit factors. Because you need time to build history, don’t wait until you’re in need of a payday loan alternative to join.
- Focus on building credit. Having a good credit score will open more lending options. If you have bad credit or a limited history, a secured credit card or credit-builder loan can help you improve your score over time.
