The Best Payday Loan Alternatives of 2016

I don’t like admitting it, but I’ve used payday loan services. Like a lot of journalists who specialize in personal finance, I began writing about consumer financial issues after having my own. I know the feeling: You need money, and you need it now, which is why you’re thinking of going to a payday loan store.

If that’s where your mindset is, it’s understandable. You probably either need money to cover basic living expenses, or to cover one major, unanticipated expense, like your furnace breaking down in the winter. And you know that you can get cash from a payday loan store fast. There’s a catch, though. The interest rates are absurdly high, and the repayment period is alarmingly short. No matter what your situation is, odds are you’ll be trading a short-term crisis for a long-term nightmare. Take it from someone who has taken out a payday loan before; there are far better ways to get a quick loan, no matter what you need the money for.

The Simple Dollar’s Top Picks for Payday Loan Alternatives

How to Choose the Best Payday Loan Alternative

First, try to find a way — any way — to not take out a payday loan.

Don’t worry, we won’t spend much time on this, but it is important to point out, since the simplest answer is often the best answer. But have you checked the sofa for coins? Recycled everything you have that could possibly make you quick money, and considered the whole garage sale idea? Have you thought about selling unwanted items on eBay? Do you have unused gift cards that you could sell on a website like Cardpool or GiftCardGranny.com? Have you considered going to your friends or family for a loan? Have you looked at your expenses to see if you can cut any of them?

While some of these options may not be long-term solutions, you may be able to drum up the amount you need, or at the very least decrease the overall amount that you need to borrow and the corresponding interest amount you’ll have to pay too.

Second, apply for a credit card.

If you’re cash-poor, but have a steady paycheck, and this is a situation where you only need some temporary financial help to get you back on your feet, then applying for a credit card is a perfectly reasonable way to get money. This is assuming that you don’t have other credit cards that you’re maxed out on, of course. Look into applying for a personal loan instead.

But let’s assume that you don’t have problems with credit cards. If you need your money fast, you’ll be interested to know that it typically takes a week to get a credit card in the mail. That said, some companies (if you’re willing to pay for it) will ship you a card overnight, and with most, once you’re approved, you should be able to do any shopping or bill paying immediately. So if you need money fast, a credit card may be the way to go.

As for what card to get, I’ll make a couple suggestions:

Chase Freedom Unlimited℠

Apply Now

on Chase.com’s secure website

Highlights

If you have one large, unexpected expense and have good credit, the Chase Freedom Unlimited℠ has a 0% introductory APR for the first 15 months, and you can earn 1% cash back on all your purchases automatically. If you anticipate being able to repay your debt within 15 months (and you use credit responsibly), this is a great option. Additionally, you can earn some money in the process too. Let’s say you have to purchase a new water heater for your house for $2,000. If you purchase that with this card, you’ll earn $20 with cash back.

But while the 0% introductory offer for 15 months on purchases and balance transfers is very attractive, the standard variable APR ranges from 14.24% to 23.24%. So, if you don’t pay off any of your water heater in the first 15 months and are eligible for the lowest APR (14.24%), you’ll end up spending $384 in interest. Not eligible for the lowest APR, then you could end up spending $663 in interest with the highest (23.24%).

Credit One Bank® Unsecured Visa® Credit Card

Apply Now

on Credit One Bank's secure website

Highlights

If you have bad credit and don’t have money on hand to make the deposit for a secured credit card, the Credit One Bank® Unsecured Visa® Credit Card is eligible for those with less-than-stellar credit and has no out-of-pocket costs to open. It’s also one of the only unsecured credit cards for bad credit that offers a rewards program — you can earn 1% cash back on gas and groceries. Another perk: It offers flexible payment dates to help you make your payments on time.

The APR is higher — 15.65% to 24.15%, depending on your creditworthiness when you open the account. The APR for a cash advance is 17.90% to 25.15%, and I’m only telling you that so I can say — do not take a cash advance on a credit card. Just don’t. If you’ll notice, it’s a higher APR for cash than purchases, which is typical for all credit cards. Only in an emergency (like, you’re stranded on the road without money) can an argument really be made that a credit card’s cash advance is a sound idea.

Finally, apply for an online personal loan.

If you can’t get a credit card that lets you pay little or no interest on your debt for a short period of time, applying for a personal loan from a reputable bank or financial institution can be a smart way to get some quick cash, too. It differs from a payday loan in two important ways: You’ll generally have a longer window in which to pay it back, and you’ll likely be paying it back in installments. Two main caveats, of course: A personal loan is only a good idea if you get a loan with a reasonable interest rate, and — as with credit card debt — if you know you can pay it back.

Where to get the loan? Obviously, try your bank first, where you’re a known quantity. A local credit union is also a good idea. But if you have shaky credit, then you being a known quantity may work against you. It becomes harder to get a loan from a traditional bank or credit union when your credit is banged up. So if that’s the case, here are a few options you may want to explore.

Learn More

on Springleaf.com's secure website

Springleaf Financial Services (soon to be named OneMain) offers personal and auto loans from $1,500 to $25,000. As you might expect, the more you want to borrow, and the lower the interest rate, the better your credit score needs to be.

The interest rate that Springleaf offers is between 16% and 36% APR. Even 16% isn’t an awesome rate, but compared to the average percentage rate of a payday loan (around 400%), this is a bargain. That being said, if you’re offered a loan for 36%, just say no. As bad as your situation may be, you’re about to make it much worse. For example, if you take a loan out for $1,500 at 16%, and you pay it back over 24 months, which it’ll let you do, you’ll pay $73 a month, coming out to $1,752 (so it cost you $252 for a $1,500 loan). But if you borrow $1,500 at 36%, and you pay it back over two years, you’ll end up paying $85 a month, and you’ll pay the company $2,040. That’s $540 you’re paying to borrow $1,500.

Learn More

on LendingClub.com's secure website

Lending Club is a peer-to-peer lending service, which offers personal loans of up to $40,000, and its rates range from the low 5.32% to the not-so-low 30.99%. Lending Club has a good reputation — earning an A+ rating from the Better Business Bureau, and has been an accredited business since 2008. It also offers fixed payments and rates, so you can count on your monthly amount to not change each month. And, if you can pay off your loan early, it won’t charge you a prepayment penalty or fee for it.

Just for “fun,” I checked to see if it would loan me $2,000, knowing what the answer would likely be, and sure enough, it turned me down flat. With my checkered credit history, I don’t blame the company in the least. In fact, shades of Groucho Marx’s famous quote (“I don’t care to belong to any club that will have me as a member”), I respect the Lending Club more, instead of less.

Learn More

on Prosper.com's secure website

Prosper is another peer-to-peer lending service that offers personal loans ranging from $2,000 to $35,000 with interest rates ranging from 5.99% to 36% for first-time borrowers (the lowest APRs are reserved for those with the most creditworthiness). Like Lending Club, Prosper has earned an A+ rating from the Better Business Bureau and has been an accredited company since 2012.

You can choose between a fixed term of 3 or 5 years and it has no prepayment penalty fees for paying off your loan early. The money is quickly direct deposited in your bank account, so you can use it right away. And, for those who live life on the go, it has a mobile app (both Android and iOS) where you can view your loan details and track what’s influencing your credit score.

Online Personal Loans At A Glance

Lender	Borrowing Limits	Minimum credit score requirement	Annual Percentage Rate
Springleaf Financial Services	$1,500 - $25,000	Upper 500s	16% - 36%
Lending Club	Up to $40,000	660	5.32% - 30.99%
Prosper	$2,000 - $35,000	640	5.99% - 36%

A word of warning about personal loans…

It isn’t only a matter of finding an interest rate that is reasonable. Be careful that you borrow only what you really need. If you get greedy and borrow far more than you need, simply because the lender is willing to give you more, and then have trouble paying the loan back, a visit to a payday loan store can seem like a trip to Disneyland in comparison.

Also, use common sense and really look at the terms and consider whether this is a loan that you can easily, or relatively easily, pay off. And I’m not trying to be condescending. When you need money fast, to keep your financial world from imploding, it’s easy to rationalize a bad decision. I’ve done it plenty of times. After all, you could easily think, “Hey, if a $500 loan would solve a few problems, think what a $10,000 loan will do.”

When You Should Consider Bankruptcy

If you’re considering getting a payday loan, that’s not necessarily a sign that you’re financially doomed. It’s simply a sign that you’re tapped out. But if you are in a cycle of debt, where you have thousands of dollars in credit card debt, and that’s why you’re turning to payday loans, then, sure, bankruptcy may be a good option for you. In fact, I look at my bankruptcy as one of the smartest financial decisions I’ve ever made.

What led to it was a small loan (I think $300) that my then-wife took out with a predatory lending institution. I’m not blaming her. I knew the company was bad news, and when she couldn’t make the payments on her own, and I got involved, I ended up paying off the loan and taking out my own loan to do it. We wound up owing over $20,000 that we couldn’t pay, all from what started out as a $300 loan.

Bankruptcy is such a personal decision that I can’t pretend to know when one should wave the white flag, and I’ve met plenty of people who were in far worse shape than we were who managed to pay off their debts without declaring bankruptcy. But if you’re so deep in debt that you know it’ll probably be decades before you can pay it off, and that staying in debt threatens your chances of paying for your kids’ college, or paying for your retirement, or both — well, that’s when I would begin mulling the idea over.

You can read more about filing for bankruptcy here.

Some Other Options We Don’t Actually Recommend

Home Equity Loans

Home equity loans can be an attractive way to get a loan – LendingTree.com is a good place to start looking – but in this case, this is a strategy that you should probably stay away from. If you were thinking of getting a payday loan, I assume you need money now, for things like groceries, or because your car broke down. It’s generally smarter to use a home equity loan for, say, a major home improvement – especially if you’re trying to sell your house.

Sure, home equity loans can be attractive because the rates are often low. But this is your house. If you go into deep debt thanks to a home equity loan and can’t pay it off, you could lose your home. Unless your finances are rock solid, I wouldn’t do this.

Have a Family Member Co-Sign for a Loan

In most cases, I wouldn’t do it. If you’re young and starting out, having your parents co-sign a credit card for you will likely help you get a better, low-interest rate credit card than you could get on your own. But I still wouldn’t recommend it, and I would never recommend co-signing for a car (even though this is fairly common) or for a house. Co-signing is a big risk, and everyone goes into co-signing with the best of intentions. The parents want to help their kid, and the kid is confident he or she will pay off the loan. But you can’t know what your financial future holds, and if you don’t want to drag your family members into your financial morass with you, well, don’t.

Car Title Loan Services

With car title loan services, the APRs are also as ridiculously high as payday loans, and you’re using your car title as collateral. Now, these companies know that you absolutely don’t want to lose your car, which means you’re going to do everything in your power to pay off the loan. This means you’ll likely keep paying off the loan and re-borrowing. And if one day you aren’t able to pay off the loan, well, there goes your car.

Why are Payday Loans so Bad?

If you’ve never taken out a payday loan, you may understandably wonder: Are they really such a terrible idea? After all, people use them. There must be a reason. There is. Payday loans are generally easy to get, provided you have proof of employment and paperwork (like a utility bill) showing where you live, along with some references.

What’s dangerous about payday loans boils down to two things:

They have high interest rates. According to the Consumer Financial Protection Bureau (CFPB), the cost of a loan can range from $10 to $30 per every $100 borrowed, although typically it’s $15, which was my experience. That comes out to an annual percentage rate (APR) of 400%, which means that if the loan was stretched out for about a year, you’d pay close to $400 to borrow that $100, according to the CFPB. The payday lending industry would say that it’s pointless to look at the APR because the companies are asking you to pay the money back in two weeks and not 52 weeks. OK, fine, but it’s this second reason that makes payday loans so unpalatable.
You have to pay the loans back quickly. Typically, it’s two weeks (sometimes a month, but then you’ll pay more than $15 per $100), and therein often lies the problem. It’s just two weeks. In fact, they’re called payday loans because you’re expected to pay back the loan on your next payday. Now, if you’re going to pay $115 on a $100 loan in two weeks, that may not sound bad at first, but realistically, you’ll borrow more than $100. You’ll ask the payday lender for, say, $400, which means you’re paying the lender $460 in two weeks. That still may sound reasonable if you’re worried about your electric being shut off right now, but keep in mind: If you don’t have $400 now, will you really have $460 to spare in two weeks? If not, you’ll pay back the $460 loan and then will probably feel like you have no choice but to borrow another $400, or worse $500, since you’re now $460 in the hole. So if you borrow $500, in two more weeks, you’ll have to pay back $575. You can see how crazy this can get.In fact, according to research the CFPB released in 2013, the average person who takes out a payday loan remains in debt for almost 200 days. So that debt you think you’ll pay off in two weeks is likely going to stick around for the better part of a year; maybe longer.And keep in mind that while paying back a payday lender does nothing to improve your credit score and history, if you don’t pay one back, they will report you to the credit bureau, and that will damage your credit.

The Bottom Line

If you can avoid taking out a payday loan, please do. If you need money, try finding it in another way; like through either selling items you no longer use, or asking friends or relatives for temporary financial help. If that doesn’t work, consider borrowing through a credit card or a personal loan before going to a payday loan store. However you eventually get your loan, always look for low-interest rates and the best terms you can find.

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