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5 Best Payday Loan Alternatives That Offer Lower Rates

While payday loans can be very accessible especially during financial emergencies, the rates can get really overwhelming. Thus, we are going to share with you some of the best payday loan alternatives to help you get through with immediate financial needs.

best payday loan alternative

In a report published by the Economic Research of the Federal Reserve Bank of St. Louis, it says that there are as many as 12 million American people who use payday loan every year.

In the same report, it says that collectively, American borrowers spend as much as “$9 billion every year on payday loan fees“. Furthermore, it states that “On average, the fee for a payday loan is $55 for a two-week loan, and the typical $375 loan will incur $520 in fees because of repeat borrowing.

If you come to think about it, the numbers are huge! Well, it is huge! That is why it is important for borrowers to fully understand first what they are getting themselves into (in this case a payday loan) before getting into it.

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While payday loans can be very helpful especially when you badly need cash, the thing is, it hurts. Paying it off hurts.

So, with that in mind, we thought of providing several other options in lieu of a payday loan. These choices are definitely low in terms of rates and charges, which is ideal especially if it’s an emergency situation and you do not have enough resources to pay off a huge loan (huge because of charges and fees).

But, before we give you our list of some of the best payday loan alternative, we are going to share with you first a couple of important information about the payday loan so you get to fully understand why a payday loan can get a little dangerous rather scary.

In particular, we are going to give answers to the following commonly asked questions:

  • What is a payday loan?
  • How does a payday loan works?
  • How much does payday loan charges?

WHAT IS A PAYDAY LOAN?

We keep saying this every time we make reviews on banks, credit unions, and other lending companies. Borrowers, it is your responsibility to research and knows more about the products and services, as well as the companies that you are dealing with. This is to avoid regretting anything in the future.

As borrowers, we owe it to ourselves to research and know our options before we sign any loan documents. Make it a point to shop around and compare products and services, as well as the corresponding features to ensure you get to land on the best deal possible.

Now, at this point, we are going to talk about what a payday loan is all about.

According to Economic Research of the Federal Reserve Bank of St. Loius, payday loans are defined as follows:

It is a type of alternative financial service that provides fast cash to cover emergency situations or help pay a borrower’s expenses from one paycheck to the next. These unsecured loans have a short repayment period and are appropriately called “payday loans” because the duration of a loan usually matches the borrower’s payday schedule. A balloon payment—full amount of the loan plus fees—is generally due on the borrower’s next payday after the loan is made.”

Furthermore, it says that normally, payday loans amount to $500 or less. Also, it usually comes due within two to four weeks after the borrower has received the loan.

It is also important to note that the loan terms vary depending on the borrower’s pay schedule or how many times he or she received his or her income, which means, the terms could be a week, two weeks, or in some cases in a month.

With the strong presence of technology and the internet, over the years lending companies have already offered payday loans online as well, which makes it even more accessible to borrowers anytime and anywhere they may be.

By the way, as mentioned, a payday loan is an unsecured loan (like most personal loans are), which means a borrower needs not any collateral to be able to borrow money from a lending company or a financial institution.

HOW DOES A PAYDAY LOAN WORKS?

So, now you already know what a payday loan is all about. This time, let’s talk about how it actually works.

Since payday loans are unsecured loans (needless to say, they are easily accessible kind of loan), which means lending companies do not require collateral, borrowers must expect high levels of interest.

Payday loans are considered as predatory loans because of having such a reputation for charging extremely high interest as well as added fees.

Generally, payday loan providers are small credit merchants. They usually come with physical locations where borrowers can apply and at the same time, get an approval of the loan. However, with the advent of technology, some payday loan services are already available online through online lenders.

To be able to apply for a payday loan, borrowers must be able to provide paystubs or pay slips coming from their employers, which shows their current levels of income.

Normally, payday lenders base the loan principal on a percentage of the borrower’s predicted short-term income. In some cases, though, lenders also look into the borrower’s credit score, as well as his or her credit history, which means a hard credit pull will be conducted during the loan application process that could affect the borrower’s credit score.

By the way, before you even look for a payday lender, make sure that your state allows it. In the United States, as of 2020, there are 12 states already as well as the District of Columbia that have banned payday loans. The 12 states are composed of Arkansas, Arizona, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, North Carolina, Vermont, and West Virginia.

HOW MUCH DOES PAYDAY LOAN CHARGES?

Borrowers, you better read this. Of all the details about payday loans, this probably is the most important of all.

We have already mentioned that payday loans charge high-interest rates or we better say extremely high-interest rates.

For your reference, payday lenders can charge up to 500% in annual percentage yield (APR). Although most states have usury laws that limit interest charges for up to approximately 35%, when it comes to payday lenders, they fall under exemptions. Thus, they get to charge more.

Payday loans are regulated and governed by individual states. However, some states outlaw payday loans of any kind, which means borrowers need to be very careful.

BEST PAYDAY LOAN ALTERNATIVES

Let’s face it. Sometimes we are caught in unexpected situations when we badly need cash but do not have enough. Thus, some of us resort to getting payday loans even if the interests are high just to be able to get through.

The thing is – there are actually a lot of other options around where you can borrow money and have the funds just when you need it.

Now, before we move on to our list of best payday loan alternatives, here’s a video of what MagnifyMoney suggests. We thought you should check this out.

Having said that, here are five best payday loan alternative borrowers must look into:

  • Credit Cards
  • Paycheck Advance
  • 401(k) Loan
  • Family and/or Friends
  • Fast Personal Loans

CREDIT CARDS

First on our list of best alternatives for a payday loan is a credit card. Compared to payday loans, credit cards have much lower interest rates and APR. Furthermore, credit cards have added flexibility, which can be very helpful among borrowers.

Usually, when you get a payday loan, if you have excess money, regardless if you still need it or not, you still have to pay for it. As with credit cards, you only pay the amount you borrow.

If in case you badly need cash, you can also avail a credit card cash advance. Although this option can be quite expensive, it definitely is much cheaper as compared to how much you are going to pay if you go for a payday loan.

In most cases, issuers charge a percentage of the advance as a fee, which is normally around 5%, with a minimum of $5 up to $10.

When opting for this option though, the key is to pay off the advance right away. Otherwise, the balance may just get out of control, which is something that you surely would not like, right?

Also, please take note that when you cash advance using your credit card, the interest would usually begin accruing right away, which is not the case when you use it for purchases or balance transfers.

PAYCHECK ADVANCE

Another possible option instead of getting a payday loan is an advance on your paycheck — that, of course, will depend on your company.

Unfortunately, not all companies offer these types of loans. While for those who do, the terms usually vary from one company to another.

To be sure, before you even think about getting a loan elsewhere, check your company first if they offer paycheck advance, and of course, make sure to check the terms as well.

As we always say, it is important to know the details to avoid any surprises. While surprises are usually exciting that is not the case when it comes to money matters, in this case, a loan.

401(K) LOAN

When everything else fails, you may also consider taking a 401(k) loan. Ideally, you should not take anything from your retirement account, but if worse comes to worst, then a 401(k) loan is a valid choice.

The thing about borrowing against your 401(k) is that it does not incur any taxes for as long as you follow all the rules. The rules include repaying the loan as scheduled or in full if you resign from your current employer.

Furthermore, 401(k) loans do not require any credit check. Also, when you pay for the loan, you pay interest back to your own account. Not bad, right?

The key when it comes to 401(k) loan is that you pay off the loan within the year. The sooner, the better so it would only have very minimal impact on your account.

The downside of this though is that your employer may not allow you to make new contributions until you are able to repay the loan, which can affect the progress of your retirement fund.

CREDIT UNIONS

Another best payday loan alternative is borrowing money from credit unions. Credit unions do usually offer lower interest rates among their members. Needless to say, they are open to both borrowers with unattractive and excellent credit scores.

However, to be able to borrow money from credit unions, you have to first and foremost, be a member of the union. Otherwise, you won’t be able to avail of any of the products and services it offers.

Now, how to qualify for a payday alternative loan?

In addition to the information we have already provided, as a borrower, you must also look into the qualifications for a payday loan alternative.

For your information, there are two types of payday alternative loans (PAL) a borrower can apply for. These are PAL I and Pal II.

To be able to qualify for PAL I, a borrower is required to join a qualified credit union. He or she must be a member of the union for at least a month before he or she can apply for a loan.

Meanwhile, for PAL II, there are no restrictions.

Now, to be sure what your credit unions offers, call or email them as soon as you can.

FAST PERSONAL LOANS

Last, but definitely not the least on our list is fast personal loans.

It is one of the best payday loan alternatives out there. It basically is much like that of a credit card. This type of loan does not require collateral, and can definitely be less expensive as compared to payday loans.

Most fast personal loan lenders have processes set up so disbursing of funds to borrowers can be done via depositing in the borrower’s account either on the same day of loan approval or the following business day.

As compared to payday loans, most fast personal loans give borrowers much longer repayment terms. Some would even last for months or years — depending on certain factors like the amount of money borrowed.

While some companies are stricter when it comes to requirements particularly credit scores, other lending companies are willing to work with borrowers that have unattractive credit.

Some of the best fast personal loan lenders are:

  • Lightstream – This lending company provides loans amounting to $5,000 up to $100,000. Thus, making it ideal for borrowers who need a large amount of money. This unsecured personal loan can be used for various reasons. However, please note that your purpose of the loan may affect the rate that the company may charge you.
  • OneMain Financial – OneMain Financial offers loans of up to $20,000. The lending company is ideal for borrowers who need same-day funding. While the company allows a larger amount of personal loans, it, however, requires collateral for that option. Generally, people who qualify for unsecured have much higher APR as compared to those with secured loans. Also, it is important to note that exact rates and limits vary depending on the borrower’s resident state, credit profile, as well as borrowing needs.
  • RISE Credit – RISE Credit is ideal for borrowers with bad credit and could hardly get a personal loan from other lenders. The downside though is that RISE charges quite high rates that span from 50% up to 299%. In addition, RISE Credit offers lower loan amounts as compared to the other options we provided. However, when it comes to repayment terms, the company offers repayment of the loan from 4 months up to 26 months (depending on the state you are in), which is desirable than those that offer repayments within just a couple of weeks.

ADDITIONAL OPTION: FAMILY AND/OR FRIENDS

If you want to avoid fees and charges, as well as huge interest rates (or if you want not to pay any interest at all), considering borrowing money from family or friends.

To be honest, your family and friends should be the first ones on your list during financial emergency situations. Why? Because most of the time, when you borrow from family or friends, they do not charge you for anything. All you need is to pay back the money in full (or depending on the terms you have agreed on).

If you looked around and found no one from among your family and friends to lend you money, then, that is the only time you check out the next possible option.

The thing about borrowing money from a family member or a friend though is that your relationship is at stake if you are unable to pay off the loan. So, unless you know in yourself that you will pay off or that you are capable of paying off the loan, then go ahead and consider this option. Otherwise, jump into the next option on your list.

FINAL THOUGHTS ON BEST PAYDAY LOAN ALTERNATIVE

Life is full of surprises, do you agree? Unfortunately, sometimes it involves money.

We are sometimes caught in situations when we badly need money to get through it, and it is during those times when we rely on lenders. We rely on companies or people who would let us borrow the money we need.

One of the popular go-to places of people in need of immediate funds is payday lenders. Yes, even if payday loans charge extremely high rates, some people would go for it thinking they have no other options left when in fact – there are other options available out there.

As mentioned above, people in need of cash as soon as possible can check out other means such as using credit cards, paycheck advance (if their company allows it), 401(k) loan, family and/or friends, and lastly, through fast personal loans.

Given the options we provided, have you already chosen a payday loan alternative where to borrow money from in case of financial emergencies?

Just keep in mind that while payday loans are tempting, you better check out other options – the best payday loan alternative to be exact.

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