11 payday loan alternatives
Avoid a payday loan’s high interest rate with these options
If you need quick access to cash, there are options other than a payday loan. Credit counseling and other lending options like personal loans or low-cost credit cards can get you the money you need without the heavy interest payments of a payday loan.
Key insights
- Payday loans often carry high fees equivalent to an almost 400% annual percentage rate (APR).
- Because a payday loan costs so much, you should only use it as a last resort.
- A credit counselor may teach you the financial literacy skills required to avoid needing a payday loan in the future.
Why avoid payday loans?
Payday loans are a problematic form of financing. They commonly carry very high fees, penalties and interest rates that are equivalent to an APR of 400%. In comparison, the average APR on an interest-bearing credit card at the time of writing was 21%, and the APR on a 24-month personal loan was 11.5%, according to the Federal Reserve.
While it can be fast and easy to get a payday loan, the high fees can make these loans challenging to repay. If you can’t afford to pay back the loan (plus the interest or fees) when it comes due, you’ll be stuck in a cycle of borrowing that’s difficult to escape.
» MORE: Interest rates and how they work
The best alternatives to payday loans
Payday loans are generally quick and easy to get, making them tempting when you have a pressing financial need and don’t have an emergency fund to draw from.
Consumers who consider payday loans “likely need cash quickly, don’t have access to savings or credit or may have difficulty accessing credit due to a lack of credit history or a nonprime credit score,” said Tim Schlueter, chief revenue officer at Avant, an online lending platform.
But before you start accumulating more debt than you can handle, consider these alternatives to payday loans.
- Borrow from family and friends
- It can be hard to ask for help, but if you have people in your life who can provide financial assistance, consider taking advantage of it. Not only is this a quick funding source, but your family and friends likely won’t ask you to sign loan documents or prove you can repay them.
They might also lend you money without interest or fees. This could potentially save you hundreds of dollars. However, they’re trusting you to pay them back. Treat the loan seriously, or you might damage your relationship.
Pros
- Quick and easy, since it’s informal with no documentation
- Inexpensive, as there likely won’t be any interest or fees
- No need to prove you can repay the loan or show you have good credit
Cons
- Relationships could be damaged if you don’t pay the loan back
- Funding is limited to the amount your family or friends have to give
- Requires you to admit to others that you need help
- Explore community emergency assistance funds
- Check with your city to see if it has any emergency relief programs. Many cities have grant programs in place that can cover unexpected costs associated with medical emergencies, damage to property caused by natural disasters and even funeral costs for immediate family members.
Some programs are available to any qualifying community member, while others are sponsored by employers. There are also programs that target specific groups of people, like those who work in the arts, for example.
Pros
- Grants may not need to be repaid
- Funds can be used for a wide range of needs
Cons
- Programs vary based on where you live and aren’t always available
- You might need to be a member of a specific community to qualify
- Apply for a personal loan
- You can apply for personal loans at local credit unions, banks and even online lenders. While you’ll get the best rates and terms if you have good credit, there are options available for people with poor credit.
Plus, if the goal of the personal loan is to consolidate higher-rate debt into a new lower-rate loan, the creditor may approve the loan even if you have bad credit if it improves your financial condition. In any case, you’ll need to show you can afford the payments to get approved.
Applying online lets you easily see if you’ll qualify. Many lenders only do a soft credit check when you apply, which doesn’t affect your credit score. If you’re pre-qualified, you’ll be given rates and terms you can use to shop around with other lenders.
Todd Schwartz, founder and CEO of OppFi, a fintech credit platform, suggested looking for lending “platforms that are willing to check if a customer's loan application would qualify for a loan at a lower interest rate elsewhere.” Not only does this save you time, but it also “demonstrates transparency and credibility to consumers.”
It usually only takes minutes to apply for a personal loan online. Usually you only need basic information about yourself, your income and how much money you want to borrow. If approved, you may get funded in as few as one to three business days.
Pros
- Many lenders offer personal loans
- Applying online is easy, and funding can happen in a matter of days
- You can see if you qualify with no credit score impact
Cons
- Better-qualified people typically get the best rates
- You’ll need to pay back the money you borrow with interest
- Must pay closing costs
- You have to show you can afford the payments to get approved
- Get a payday alternative loan
- Many credit unions offer payday alternative loans (PALs). These are short-term loans up to $2,000 with terms of one to 12 months and low application fees.
PALs have much lower APRs than payday loans (no more than 28%). Plus, they’re nationally regulated by the National Credit Union Administration (NCUA).
Pros
- The cost of a PAL is much lower than a payday loan
- PALs are a standard product offered by national credit unions
Cons
- Maximum loan amounts are small
- Interest rates are potentially higher than rates on personal loans
- Request a pay advance
- Some employers will allow you to take an advance out on your pay. To see if this is an option, look at your employee handbook before you ask your boss. If your request is approved, take the time to assess your finances to avoid repeating the cycle of coming up short every month.
There are also some loan apps that offer pay advances. Some, like EarnIn, don’t charge mandatory fees, while others may charge very high fees. Carefully look at the costs before requesting an advance.
Pros
- May already be offered by your employer
- Some pay advance apps don’t charge any mandatory fees
Cons
- Not every employer will provide a pay advance
- Fees charged by pay advance apps vary widely
- Get a 0% APR credit card
- If you have good or excellent credit, you might qualify for a 0% APR credit card. You’ll usually need to transfer balances from another card to qualify for this rate and repay them in full during a short introductory rate period to avoid paying interest.
Even so, getting a 0% introductory rate is better than paying an APR of up to 400% for a payday loan.
Pros
- No costs if you repay before the introductory rate expires
- Introductory periods are often much longer than a payday loan repayment term
Cons
- 0% APR credit cards are often reserved for those with good or excellent credit
- You will be charged deferred interest if you don’t pay in full during the introductory period
- Use a credit card cash advance
- A credit card cash advance can be paid back over a longer period than a payday loan. While cash advances also carry high interest rates, a longer repayment term can make it easier to repay the loan without getting stuck in a cycle of accruing debt.
Pros
- Interest rates are lower than rates on payday loans
- You can simply make the minimum payment if you can’t pay the balance in full
Cons
- You’ll pay a lot of interest if you take many months to pay back the cash advance
- Requires available credit on your credit card
- Pursue credit counseling
- If you need a payday loan, the reason might be that you’re not properly managing your finances. You can permanently solve these problems by increasing your financial literacy and building a sustainable budget.
Many nonprofit credit counseling agencies teach consumers how to get out of debt and build good financial habits. You can get at least an initial credit counseling session for free.
Plus, the agency might waive its fees if you’re experiencing a financial hardship or have a financial need, such as having an income below the poverty line. A good credit counselor will recommend strategies you can apply to manage your debt.
Pros
- Initial credit counseling from a nonprofit firm is free
- Learn financial literacy skills you can apply for life
- May be free if you have a financial hardship or need
Cons
- You need to be receptive to the advice given by the credit counselor
- It may not help with an immediate funding need
- If you don’t have a financial need, you might have to pay fees for ongoing help
- Use some of your home equity
- If you don’t need immediate funding and have equity in your home, you may be able to cover your cash shortfall by using some of your home equity.
A home equity line of credit (HELOC) is a line of credit you can use and repay as needed, while a home equity loan provides you funds with a single payout.
These loans may take up to 30 days to get, since they’re backed by collateral, so they’re not best for fast funding. However, you might pay a lower rate than with unsecured debt, since the loan is secured by your home.
Think carefully before using your home’s equity. It puts your home at risk, as your lender can foreclose on your home if you don’t repay the loan as agreed.
Pros
- Costs might be lower than with unsecured debt
- You can repeatedly borrow and repay the funds with a HELOC
- A home equity loan might provide you with a large lump sum
Cons
- May take 30 days or more to get funding
- You risk losing your home if you don’t repay the loan as agreed
- You must have equity in your home to qualify
- Create a payment plan with your creditors
- Believe it or not, you can negotiate with creditors. Some creditors will work with you if you contact them directly and explain your hardship. Always try to work out a payment plan before taking out a high-interest-rate loan.
Lenders generally want to help rather than see you struggle. If you’re having trouble making payments, contact your lenders to discuss options such as delaying or forbearing your payments. You might be able to avoid having your loan go into collection.
If you’re unsure whether you can negotiate a payment plan on your own, you can work with a debt relief company. For example, nonprofit credit counseling agencies can help you set up a long-term debt management plan (DMP) and may negotiate lower rates and fees on your behalf.
For-profit debt settlement companies can sometimes help you negotiate with your creditors to settle for less than you owe. However, if you choose this option, remember that it could hurt your credit for a long time. Proceed cautiously.
Pros
- Creditors may agree to pause your payments for a financial hardship
- You might be able to get reduced rates and fees on your debt
- You could end up paying your creditors less than you owe
Cons
- No guarantee your creditors will work with you on a payment plan
- It might take time to work out an agreement
- Debt settlement can have a long-term negative impact on your credit
- Borrow from your 401(k)
- While it comes with its share of fees and penalties, borrowing against your 401(k) can be a better alternative to a payday loan because you’re essentially borrowing from yourself. You will have to pay an early withdrawal fee (generally 10%), and the amount you withdraw will be taxable.
Remember that you should avoid borrowing from your 401(k) as a habit, as you might end up derailing your retirement goals. Instead, treat this option as a last resort, and try to pursue other options first.
Pros
- You’re borrowing from yourself, not a lender
- Funding may be fast because you don’t have to apply for a loan
Cons
- You’ll need to pay fees and taxes to withdraw your funds
- It might set you back from achieving your retirement goals
How to find a safe payday loan company
If you’ve exhausted your options, a payday loan may be necessary. In this case, be careful when considering your payday loan lender. Stick to payday loan companies with a demonstrated online reputation.
Lenders should clearly state their fees and repayment terms upfront in language you can understand. Read about the fees and terms thoroughly. Ask questions to make sure you understand what you’re agreeing to. In some cases, additional requirements and qualifications are necessary for the loan to be processed or approved.
Once you’ve paid your loan back, consider working with a credit counselor to repair your financial health and start saving toward an emergency fund — so you’re prepared if unexpected costs come up in the future.
» MORE: Payday loans vs. personal loans
FAQ
Are payday loans secured or unsecured?
Payday loans are unsecured. This means you don’t have to offer any collateral, such as cash, your house or a car, to get this type of loan.
Why do payday loans charge high interest?
Not only are payday loans unsecured, but many payday lenders don’t rely on any credit check to approve you. As such, these loans often carry a lot of risk, since many borrowers don’t pay them back as agreed. To compensate for this risk, payday lenders may charge high interest and fees.
How long do payday loans last?
Many payday loans have very short repayment terms of two weeks or less. If you take longer than this amount of time to repay the loan, your lender may charge you “rollover” fees that are added to your loan balance each time you extend the repayment term.
Are payday loans legal?
Payday loans are not legal in every state. Check your state's rules to see if this type of loan is allowed where you live.
Bottom line
A payday loan might be tempting if you need money fast. The problem is that the costs can be very high — up to the equivalent of a 400% APR. These high costs can trap you in a cycle of borrowing that’s difficult to escape.
If you need money now, look for the most affordable option and devise a plan for how you’ll realistically repay the loan. Then, figure out what caused the cash need in the first place and take steps to avoid a similar situation in the future. A credit counselor can teach you financial literacy skills to help you properly manage your money.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Federal Reserve, "Consumer Credit - G.19." Accessed April 21, 2023.
- Consumer Financial Protection Bureau, “What are the costs and fees for a payday loan?” Accessed April 20, 2023.
- National Credit Union Administration, “Payday Loans.” Accessed April 20, 2023.
- National Credit Union Administration, “Payday Loan Alternatives.” Accessed April 20, 2023.
- National Conference of State Legislatures, "Payday Lending State Statutes." Accessed April 21, 2023.
- National Credit Union Administration, “Board Extends Loan Interest Rate Ceiling; Approves Annual Performance Plan.” Accessed April 21, 2023.
- National Credit Union Administration, “Payday Alternative Loan Rule Will Create More Alternatives for Borrowers.” Accessed April 20, 2023.
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