Most Americans are in debt in some form. And if you’re among the majority, you’re likely looking for new ways get out of debt. Payday loans are too common an alternative for many. But, they come at a high cost and can do more damage than good. Especially if you wind up with one of the payday lenders that pray on those in financial distress.
According to the Consumer Financial Protection Bureau, “A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%.”1 By comparison, most credit card APRs top out in the mid-to-high 20% range.
That 400% interest rate is why finding low-interest alternatives to payday loans is critical. When you have access to lending options that don’t put you at risk for more debt, you can get out of debt instead of getting deeper into it.
Before you take a payday loan, consider one of these eight low-interest payday loan alternatives.
1. Negotiate a Payment Plan
If you’re having trouble with your monthly bills or need an extension, call your creditor or utility company and negotiate new repayment terms or a longer timeline. You’ll be surprised how many are willing to work with you and offer an extension. Some make it very simple by making a short extension an option on their website even.
Keep in mind that making late payments without contacting your creditor can drag down your credit score when your delinquent payments are reported to the credit bureaus.
2. Peer-to-Peer Lending
One of the latest trends in the world of lending is peer-to-peer lending. While it’s mostly intended as a way to fund projects or small businesses, a few sites, such as CircleBack Lending offer personal loans intended for debt consolidation and similar purposes. Know though that your credit score will affect your chances of getting a loan, so if your debt has dragged your credit score down, keep reading.
3. Help from Family
Turning to family—or friends—is another option to borrow money. But, be careful with this approach. If a friend or relative is willing to help you out with some cash, make it a point to pay them back as quickly as you can. The longer you drag out repaying someone, the harder it’s going to be to on your relationship. You don’t want to damage your relationship with your family over money.
4. Your Own Savings
When you need money quickly, it’s time to consider tapping into your savings account or your emergency fund. While it might be hard to use your savings, it’s an option that keeps you from paying interest on a payday loan or credit card.
When you take money out of your savings account, be sure to replenish it. This way you always ensure that you save more than you spend. It also maintains your emergency fund for future needs.
5. An Advance from Your Employer
Financial emergencies hit everyone at some point. Chances are that even your boss knows what it’s like to be short on cash for needed expenses or payments. So, consider talking to your employer for an advance on your salary. It’s not a loan, but an advance. Your work is your collateral. There’s no interest to pay. And, all your employer can do is say, “no.”
It can be a little bit awkward to ask but, it’s a reasonable request. Even low-interest payday loans won’t give you rates this good.
6. A Personal Loan or Credit Union Loan
A personal loan can be used to cover just about anything. And interest rates on personal loans are a lot lower than on payday loans. Rates for many personal loans are even lower than on credit cards. Granted, you’ll pay a higher rate if you have a poorer credit score, but a reputable personal loan lender still won’t charge 400%.
If you’re a member of a credit union, consider talking to your member services department about short-term loan options. Many credit unions offer small, short-term emergency loans to help their members get back on their feet. Credit unions offer low-interest loans that are much more affordable than those from traditional banks, and their approval process is often more flexible.
7. A Credit Card
If you already have a credit card, consider using it instead of a payday loan.
If you don’t have a card and you’ve worked hard to maintain a solid credit score and a positive reputation with credit agencies, you could be in a great position to get a good credit card—even one with a low-interest credit card.
Even if your credit isn’t good, there are a variety of credit cards available for those with bad credit, poor credit and fair credit and even those with no credit. And 26 or 29% interest on credit card debt adds up to a lot less than 400% interest on a payday loan.
With any option, plan to pay off your debt as quickly as possible. Even lower interest rates on recurring debt add up and can hurt your credit score if you don’t make your payments or have too much debt in relation to your credit limit.
If you’re considering the credit card or personal loan route, find out your credit score—for free—before applying so you know what you might be looking at as far as approval and interest rate.
Another credit card option is a cash advance on your card. Note though, that sometimes, credit card cash advances have higher interest rates than regular purchases due to an added finance charge.
8. Credit Counseling
If your financial situation is out of control, consumer credit counseling can be a great resource to help you analyze your debt, define a realistic, personalized budget and negotiate lower interest rates and lower monthly payments. It’s important to make sure you’re working with a legitimate credit counseling service and not an operation that preys on financially strapped consumers. To find an accredited consumer credit counseling service, you can visit the National Foundation for Credit Counseling or call them at 800-388-2227 to find a credit counselor near you.
Find added ways to navigate debt in the Managing Debt resource center.