June 11, 2020
Shawn Lane
Consumer Credit Expert
Payday loans get a lot of flak – and rightfully so. They have outrageous interest rates and often use predatory practices to lure in financially vulnerable borrowers. But if you think avoiding payday loans is easy, you’ve probably never been in a situation where you need money immediately. When you live paycheck to paycheck, even a small emergency can leave you desperate for a little extra money to pay the bills and put food on the table.
Payday loans are often marketed as a quick source of cash for emergencies, but the cost of convenience is steep. With fees that typically amount to 300–400% APR, most borrowers end up paying far more than they borrowed. Studies from the Consumer Financial Protection Bureau show that nearly 4 out of 5 payday loan users re-borrow within 14 days, setting off a cycle that’s tough to escape.
Thankfully, payday loans are not the only debt product that can fill that role. With a little more legwork, you can find the extra cash you need without falling into an ever-worsening spiral of debt. Here are some of the best options.
Payday Alternative Loans
Payday alternative loans (PALs) are loan products offered exclusively by federal credit unions. There are two types of PALs: PAL I and PAL II. Some credit unions only offer one type, while others provide both. You can call any federal credit union to see which type is available.
The amounts for PAL I loans range from $200 to $1,000, and the terms last from one to six months. You must be a member of the credit union for at least one month to qualify for a PAL I.
PAL II loans have a maximum amount of $2,000, no minimum amount, and terms ranging from one to 12 months. You do not have to be an existing member to qualify for a PAL II.
Both PAL types have a maximum interest rate of 28% and fixed monthly payments. Credit unions are allowed to charge an application fee of $20 or less.
You can find your nearest federal credit union by visiting this link. Some credit unions have specific membership requirements, while others are open to the general public.
Personal Loans
Banks and credit unions offer personal loans for various purposes, including credit card debt consolidation, medical expenses, home repairs, and unexpected emergencies. You can even use them to pay for a wedding, vacation or home remodel.
Personal loans have much higher limits than payday loans, ranging from $1,000 to $50,000. Some lenders even let you borrow as much as $100,000 if you have a high enough credit score.
Interest rates on personal loans are typically lower than those on payday loans, usually ranging from 5% to 36%. Personal loans have fixed monthly payments and terms ranging from one to seven years. In general, the higher the amount borrowed and the longer the term, the higher the interest rate you’ll pay.
You can apply for a personal loan with your current bank, a credit union, or an online lender. After applying and being approved, you can receive the money within 24 to 72 hours.
Credit Cards
If you don’t qualify for a PAL or personal loan, a credit card may be the next best option instead of taking out a payday loan.
The downside to using a credit card instead of a personal loan or PAL is that your credit score may be negatively impacted due to an increase in the utilization of your credit card limits. If you have a $2,000 balance on a credit card with a $5,000 credit limit, then your credit utilization ratio will be 40%. As your utilization increases, your credit score will decrease.
If you have a decent credit score, you may qualify for a credit card with 0% APR on new purchases for a specific period. If you can repay the balance within this timeframe, you can avoid paying any interest charges; however, you must be disciplined and pay more than the minimum amount every month. Please calculate the repayment amount to ensure you settle it before the introductory period expires.
Each of these three alternatives will be less expensive than a payday loan. As a bonus, most of these debt products will report activity to the three credit bureaus and increase your credit score – if you make payments on time.
Ready to make a plan to reach your credit goals? Schedule a free credit analysis with a Financial Renovation Solutions credit consultant today.
