Payday Loans Alternatives

Payday Loans Alternatives refer to credit and loan facilities that people tend to opt for to replace traditional payday loan options for their cash requirements. These payday loans are high-interest, short-term loans for people who are seeking quick cash accessibility. The amount of payday loans is based on the borrower’s income.

Payday loans are often observed as predatory lending. They are typically taken by people stuck in an abrupt expense or emergency financial need but come at a higher cost. Payday loan alternatives allow people to look for other loan options and avoid the risk of getting stuck in a debt trap with high interest rates.

Payday loan alternatives are borrowing options for those who do not wish to apply for payday loans in financial emergencies. People approach different lenders offering quick cash loans to meet their abrupt expenses and unexpected bills. However, most of them come at a high cost with an interest rate, including payday loans, which are high-interest loans offered for short-term cash requirements. This is where the alternatives to such loan options come into the scene.

Payday loans are considered predatory lending because the lender charges the borrower a high interest rate and wants them to pay on time. If they fail, the lender charges them high-interest penalties and additional costs. This is what makes payday loans considered a major pitfall, which, if not managed properly, can throw a borrower into a debt trap.

Using payday loan alternatives, on the other hand, offers convenience, flexibility, and a sort of comfort to borrowers. Many people like to avoid payday loans and opt for different alternatives; not only is it a good financial decision, but it also saves them from falling into a financial pitfall. With payday loan alternatives, individuals can explore different borrowing options where they have to pay low interest rates, get a better loan duration, and take a loan for a larger amount of money compared to payday loans.

The following are the main alternatives to payday loans that one might opt for -

1. Friends and family—Borrowing from friends and family is the most common form of payday loan alternative. This way, you borrow money from your contacts, pay with flexibility, and often do not have to pay any interest on it.
2. Credit union—A loan from a credit union is preferred, but one has to be a member of the credit union to take out these loans. Unlike banks, credit unions are member-owned institutions, involving less paperwork and low loan eligibility requirements.
3. Bad credit loan—When an individual has a low credit score or a short credit history, they can apply for bad credit loans, which do not require any collateral. The interest rates are not low but are not as high as payday loans. These loans do come with additional charges and origination fees, which increase their overall cost.
4. Emergency funds—Every individual is advised to have a reasonable emergency fund that they can use in times of financial crisis. Using the emergency fund is yet again one of the best options against payday loans.
5. Advance paycheck—People with salaried incomes can talk to their managers and ask for an advance paycheck to resolve their financial needs. This way, they can work for it and do not have to get involved in any lending option or loan procedure.
6. Financial assistance schemes—If the financial crisis is expected to last a long time, borrowers can check whether they qualify for financial assistance programs in their local community or area. Some schemes offer rental assistance, while others can help with food and varied expenses.
7. Payday alternative loans—These are called PALs and are only offered by some federal credit unions to help their members financially. These loans charge an application fee of up to $20, and people can borrow from $200 to $1000. PALs generally have a loan period of one to three months, and they provide quick money.
8. Using credit cards responsibly—If an individual has a credit card, they can use it to pay their bills. This is again the least recommended alternative to payday loans as if not paid on time, credit card bills can lead to long debt traps.

Here are two distinct examples of payday loan alternatives -

Example #1

Tulip lives with her grandparents. One day, her grandmother slipped and fell in the backyard. Tulip took her to the hospital, and the doctor suggested immediate surgery. Now, Tulip needs quick cash. She admits her grandmother to the hospital, comes back home, and analyzes different borrowing options. At first, Tulip thinks of taking a payday loan, but she knows that payday loans charge high interest rates and can damage her finances.

Hence, she looks at her other borrowing options and finally decides to borrow money from her friend. This way, she would not have to pay any interest, and she could return the amount with better flexibility. 

Example #2

An August 2018 report indicated how many famous companies, like Walmart, have started offering alternatives to payday loans to their workers. According to the report, though America is a strong economy, individuals are hardly left with any cash for their additional or sudden financial requirements. Hence, whenever they need some cash, they have to opt for options with higher costs to pay in return. Given the struggle that workers have to go through, many companies have introduced a scheme where they help their staff members with cash as and when required, and that is done at a minimal charge.