Just how devastating a payday loan can be to your personal finances becomes clear once you understand how such loans are structured. (For more, see: Beware of Payday Loans and The Basics of Lines of Credit.)

Alternatives to Payday Loans

1. Personal Installment Loan – One alternative is a personal unsecured installment loan from a responsible lender such as a credit union, bank or other financial institution. According to the Center for Responsible Lending, in contrast to payday loans these products feature:

  • Minimum 90-day repayment
  • Installment option
  • No unfair collateral (car title) requirement
  • Limits on renewals
  • Consideration of borrower’s ability to repay
  • No mandatory arbitration
  • One-time-only late/penalty fees 

2. Payment Plan with Creditors – If the problem involves debt, contact one or more creditors and ask to negotiate partial payments or work out a payment plan on a temporary basis. Sometimes lowering or delaying a payment or two is all that is needed.

3. Pay Advance – Some employers grant paycheck advances. If you work for a large company, check with human resources. With a small business, ask the owner about an advance. Normally, since this is an advance and not a loan, there would be no interest. It’s important, of course, not to abuse the practice. 

4. Credit Counseling – While not an immediate solution, credit counseling can help avoid diving deeper into debt. Visit the National Foundation for Credit Counseling or call 1-800-388-2227 to begin the process of developing a budget and working out a debt repayment plan with your creditors. 

5. Emergency Assistance – Local churches and community organizations often provide emergency assistance, providing help with everything from utility bills to groceries to making a car payment. The Low Income Home Energy Assistance Program (LIHEAP) helps low-income households with financial assistance facing cold (or hot) weather emergencies (as well as other weather-related issues).

6. Credit Card Cash Advance – Although a credit card cash advance isn’t ideal, even at 30% APR, it’s still much less expensive than a payday loan. Be aware that some credit card companies take advantage of consumers who need quick cash by offering a secured credit card tied to a savings account or other asset. (For more, see How a Cash Advance Works.)

7. Retirement Accounts – It may be possible to make a partial withdrawal from your individual retirement account (IRA) or 401(k). You can (effectively) borrow from your IRA once a year, penalty-free, if you put the money back within 60 days. If you don’t, you’ll pay taxes plus a 10% penalty if you are under the age of 59½. (For more, see Should You Borrow From Your Retirement Plan?)

Some (not all) employers permit loans on 401(k) accounts. If yours does, you may be able to borrow half your balance up to $50,000 with five years to repay the loan. Of course, money borrowed is not earning interest for your retirement. (For more, see Sometimes It Pays to Borrow from Your 401(k).)

8. Friends and Family – Borrowing from people you know can strain relationships. However, if you need a small amount for a short period and are sure you can pay it back, this option may be for you. Offer to pay reasonable interest on the “loan” since chances are whoever loans you money is taking it out of another interest-bearing account. 

9. Bank/Credit Union Cash Advance – Many banks and credit unions have overdraft protection or cash advance provisions. Although more expensive than an installment loan, such options are less costly than a payday loan. Check with your bank or credit union to see what is available and sign up – just in case. 

10. Life Insurance Loan – Many whole life insurance policies provide for loans if you have cash value in the policy. Best of all, you have your entire life to pay the loan back. If you fail to pay it back, the insurance company subtracts the loan from the death benefit. 

11. Online Options – Websites such as LendUp offer loans, education on finances and even the opportunity to rebuild a damaged credit score. Peer-to-peer lending websites like Prosper and Lending Club also offer alternatives that are cheaper than payday loans. (For more, see The 7 Best Peer-to-Peer Lending Websites.)

12. Pawnshops – If you have something of value you can use as collateral, a pawnshop might be a loan source worth considering. Finance charges vary by location, so make sure you know what the cost of borrowing will be. 

For more, check out: Digging Out of Personal Debt.

Problems With Payday Loans

There are two major reasons why you seriously want to avoid these loans.

• High Cost

Some people look at the finance charges attached to payday loans and think, “That’s not so bad.” That’s because most payday loans are for relatively small amounts of money over short time periods.

Unfortunately, when you do the math, another story emerges. A $15 fee per $100 borrowed, for example, translates to a whopping 390% APR – a far higher interest rate than a conventional loan.

• Repetitive Borrowing

The second problem – repetitive borrowing – happens when you discover you need to borrow again to pay off the first loan, setting in motion a cycle of debt. In fact, according to the Consumer Financial Protection Bureau, more than 80% of payday loans are rolled over or renewed within two weeks.

The Bottom Line

There are likely more alternatives to a payday loan than you realize. One or more of them might fit your needs and be well worth considering. Options that do not include borrowing should be explored first, although almost any other choice is better than a high-interest payday loan.

However you handle your current crisis, resolve to start an emergency savings fund as soon as possible. Even a small amount, set aside each payday, will add up, and the next time you find yourself short, you will have something to fall back on that doesn’t cost you an arm and a leg.