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It's almost the end of the month and money is tight. Then you're hit with a new unplanned expense—maybe a car repair, an unexpected overdraft or medical expense that throws your carefully planned budget out of whack. You've seen ads for payday loans and think that might be just what you need to get by for the next week or so.
Payday loans can help you make it to your next paycheck, but they charge extremely high interest rates and can be difficult to repay, which could leave you deeper in debt. Instead of taking out a payday loan, you may be able to borrow from friends or family, getting a personal loan, use an early payday app or look for financial assistance.
What Is a Payday Loan?
A payday loan is a short-term loan provided by lenders outside of the traditional banking space. These loans are typically $500 or less and have terms of two to four weeks, or until your next payday. While many states regulate payday loan terms, you can expect to pay about $15 per every $100 borrowed—or 400% or more in interest based on the annual percentage rate (APR), according to the Consumer Financial Protection Bureau (CFPB).
Payday loan regulations vary by state, with some states even banning them entirely. Payday lenders don't usually require a credit check or proof that the borrower has the means to pay back the loan. These loans commonly are rolled over or reborrowed if the borrower can't pay the amount back as agreed—resulting in even higher borrowing costs and a cycle of costly debt for borrowers.
Alternatives to Payday Loans
If you need cash to help you cover expenses until your next paycheck, consider these alternatives to payday loans.
- Apply for a personal loan. Credit unions and other lenders may be willing to lend you the money you need, even if you have bad credit. If you don't belong to a credit union, look into local credit unions in your area and find out if you qualify (you must be a member of a credit union to apply for a loan there). Other lenders, including some online loan providers, offer loans to those with fair or poor credit.
- Reach out to friends and family. If you need a smaller amount to get you to your next paycheck, consider asking a family member or close friend for a loan. Even if it's an uncomfortable conversation, this could be a good option, as long as you put the loan agreement in writing and stick to the terms you've agreed to. Because this option could potentially negatively impact your relationship, proceed with care and avoid agreeing to any repayment terms that you think you may be unable to fulfill.
- Research local resources. Contact a local nonprofit or organization that helps individuals with short-term financial concerns. If you're unable to afford groceries for the month, reach out to a local food pantry. You can call 311 to find out about local services or do an online search for resources in your area. If you think you may need longer-term help, look into general financial assistance programs.
- Talk to your job's human resources department. Your employer may provide short-term loans to employees. Larger organizations may have short-term financial resources available or guidance on how to connect with organizations within your city or town that may be able to help you.
- Explore early payday apps. These may be offered by your employer, an online bank or other companies. Early payday apps typically provide a portion of your pay before your payday or a service that allows you to take small advances on your future income. While not a long-term solution, early payday apps offer a lower-cost alternative to payday loans.
- Borrow from your credit card. If you have credit available on your credit card and know you'll be able to pay off the amount you need fairly quickly, you may consider a credit card cash advance. Before using this option, check to see what interest you'll pay on the advance, since many cards charge higher interest on cash advances than on regular purchases.
- See if you can negotiate your bills. If you're having trouble paying utility or medical bills, for example, you may be able to work out a payment plan or negotiate a lower payment with your creditor.
- Look for ways to bring in extra money. Consider selling items you no longer need, such as lightly worn clothing items, exercise gear or tools. Or pick up a side hustle to help tide you over. Staffing a one-time event, participating in a focus group, or offering services such as cleaning, cooking, online tutoring or pet sitting are all potential options.
Learn more: How to Get Emergency Money
Before letting fear impact your decision, take a step back to review your options and do some research. In addition to the above options, this could include reaching out to see if there's a way to negotiate the terms of your unexpected bill or working out a payment plan. If you have some time to take action, consider selling items you no longer need, such as lightly worn clothing items, exercise gear or tools. Or pick up a side hustle to help tide you over. Staffing a one-time event, participating in a focus group, or offering services such as cleaning, cooking, online tutoring or pet sitting are all potential options.
How Does a Payday Loan Affect Your Credit?
Payday loan companies don't typically check your credit or report to the credit bureaus, so if you take out a payday loan and pay it back as agreed, you may see no change to your credit scores.
However, if you're unable to abide by the loan's terms and stop repaying your loan, the lender may turn over your account to a collection agency, and that account will likely appear on your credit report and have a negative impact on your credit scores.
How to Deal With Existing Payday Loan Debt
If possible, try to negotiate with your payday lender before allowing your account to become past due. If you're already past that point, speak with your lender to find out if there are any options to help you get back on track. Many states require payday lenders to provide extended payment plans (EPPs). This agreement extends your loan repayment period and may lower the monthly amount due.
Other options that could help you pay off your payday loan include a debt consolidation loan or debt management plan, which is a more in-depth debt payoff plan you can get through a certified credit counselor.
The Bottom Line
There are plenty of alternatives to payday loans that you should consider before saying yes to a financial tool that could complicate your financial life even further. If you're regularly running short of money to cover your bills, consider seeking credit counseling from a reputable agency. Credit counselors can help you develop a plan for managing your money more effectively.
Keeping tabs on your credit score is an important part of managing your finances. Good credit can help you qualify for lower-cost loans. You can check your FICO® Score☉ Θ for free from Experian and get insights on things you can do to improve it, potentially unlocking better credit options.