Payday Alternative Loans

What Are Payday Loans?

A payday loan is a short-term, high-interest personal loan, usually for a small amount, due on your next payday. While the idea sounds simple, these loans can be extremely risky. Before taking out a high-cost payday loan, consider alternatives.

If you have an account at a credit union or bank, ask about less expensive alternatives available to you, especially if you have direct deposit or a stable credit history.
Talk with your creditors to negotiate more time to pay bills.
Consider borrowing from family or friends you can trust.
Shop for a credit offer with lower costs, like a low-rate credit card.
Inquire about an advance from your employer.
Contact your state or local government to see if any emergency assistance programs are available.
If you are an active-duty service member, seek assistance from a service relief society or military welfare society.

How Do Payday Loans Work?

A payday lender will confirm your income and checking account information and deliver cash on the spot or electronically if working online, which may require a day or 2 for the money to reach your account. The lender will ask you for a signed, post-dated personal check or permission to electronically withdraw money from your account on the due date. The loan is due on your next payday, typically in two weeks, but sometimes in one month.

You may hear the cost of borrowing as fees rather than interest. For example, if you borrow $100, and the fee is $15 for every $100 borrowed, your total repayment will be $115. However, payday lenders must disclose the annual percentage rate (APR) to you before you sign a loan agreement, so a $100 payday loan with a $15 fee due in two weeks is the same as an APR of 391%. The APR is the best way to compare loans and credit cards and what option may be safest and least costly.

Federal Credit Unions: Payday Alternative Loans (PALs)

If you have been a credit union member for at least one month, you may be able to get an alternative to high-cost payday loans: the NCUA allows federal credit unions to offer small-dollar loans called Payday Alternative Loans (PALs). A federal credit union can charge an application fee only in the amount needed to recoup the actual costs associated with processing the application, up to $20. PAL amounts can range from $200 to $1,000. The loan term must range from 1 to 6 months. Up to three PALs may be granted to the same borrower during a six-month period, as long as no PAL overlaps or is rolled over. Some credit unions also offer free financial counseling services to their members. Contact your local federal credit union for availability of PALs and free financial counseling services.

Additional Alternatives to Payday Loans

Many state-chartered credit unions offer products similar to PALs. Federal credit union loans that aren’t official PALs can have a maximum APR of 18%, according to the NCUA. That may be a better deal than a PAL at 28% APR, but lenders may have stricter eligibility requirements. If you are searching online, you might find lenders that have adopted the “payday alternative loan” language but read the fine print because sometimes the lender isn’t a credit union, and its loan terms aren’t beneficial to you. Most financial experts agree the APR should not exceed 36% for a loan to be affordable.

Personal Loans

You could potentially get a personal loan even with bad credit. The interest rate you’ll get will most likely be on the higher end, but still much more affordable than what payday loans charge. Personal loan lenders report positive payment history to the credit bureaus, unlike traditional payday loan lenders.

Payment Plans

If you’re short on cash because of your current debt obligations, contact your creditors. You may be able to get on a payment plan which reduces your monthly payments. This will cost you more in interest but might allow you to get out of your situation without borrowing more.

Cash Advance From a Credit Card

You can take out cash from your credit card with a cash advance. This is still an expensive option since cash advances come with a higher interest rate than the card’s purchase APR. Interest starts to accrue immediately, but the costs will most likely be lower than those of a payday loan.

Borrowing From Family or Friends

Your friends and family may be willing to help you in a financial emergency. Depending on what you agree on, you might not even have to pay any interest. Before you agree, consider how the loan might affect your relationship in case you fail to pay back the borrowed money.

Frequently Asked Questions

Absolutely! You should feel free to ask the loan officer for clarification of the Truth in Lending Disclosures. These disclosures provide important details such as the interest rate, the total number of payments, payment due dates, the overall cost of the loan including interest, and any late fees that may apply if payments are missed. Additionally, if the loan officer inquiries about your interest in credit life and disability insurance, be sure to ask how it will impact your monthly payments and the total cost over the life of the loan.