Alternatives to Get Out of the Payday Loan Cycle

Payday loans provide lending options to the poorest levels of society, people who have bad credit or no credit, and those who feel they have no other options when faced with a crisis. Unfortunately, because of the way payday loans are designed, they place people on a treadmill of never-ending debt.

The payday loan industry lends well over $38 billion annually. There are now more payday loan locations in the U.S. than McDonald's – that's more than 20,000 storefronts. Lenders tend to target the poorest communities; the mean annual income of a payday loan customer is $26,167, according to the Consumer Financial Protection Bureau.

What options do people have who have poor credit, no credit, or struggle to find access to financial assistance? There are options out there if you know where to look.

How Payday Loans Work

Although payday loans go by many names – cash advance loan, check advance loans, and deferred deposit loans – they all operate under the same basic premise. They provide short-term, high-interest loans – typically under $500.

For the borrower, a payday loan is a popular choice for financing because it's relatively painless and easy to access. In most circumstances, a customer only needs to fill out some basic information and provide a post-dated check or bank debit authorization.

A payday loan term is usually between two to four weeks, with the check or the debit authorization already made out for the price of the loan plus fees. Often there is a steep fee structure, for example, $40 for a $300 loan. If you miss the deadline for repayment, the late fees and increased interest rates quickly spiral out of control.

Considering Alternatives to Payday Loans

If you face a financial crisis, what are your options beyond a predatory cash advance loan? First, it's important to consider the reason why you require a cash advance in the first place. Is it a recurring bill or loan payment? Or is it a one-time emergency?

Here are some payday loan alternatives:

Alternative Options for a Recurring Payment

• Renegotiate the terms of debt directly with the lender
• Request a deferment or forbearance period on a student loan
• Refinance your debt into one loan for a lower monthly payment

Alternative Options for a One-Time Emergency

• Use a credit card to cover the charge
• Ask a close friend or relative for a short-term loan
• Ask your employer for an advance on your next paycheck
• Discuss your options with the creditor directly
• Apply for a line of credit

Personal Loans for Bad Credit

Even for those who struggle with maintaining a good credit score, there are personal loans for bad credit.

• Although most personal loans come unsecured, depending on the circumstances, it might make sense to explore a secured line of credit or secured personal loan. These loans come tied to a vehicle or house and therefore come with higher risk but better terms. They only make sense if you expect to meet every loan repayment on time and in full.
• Another option is to seek out a cosigner for a personal loan. With the addition of a cosigner, many financial institutions will accept poor credit, as long as the cosigner is in good standing.
• A final option is to shop around with all the bad credit lenders available to you. Explore what rates and repayment terms they offer and don't be afraid to negotiate for better ones. Importantly, don't settle for terms that make you uncomfortable or that you don't fully understand.

Credit Cards for Bad Credit

For emergencies, it can be helpful to fall back on a credit card to cover the daily necessities. But can you get a credit card with a bad credit score? Some people with bad credit can get approved for a credit card; otherwise, the answer is to seek out a secured credit card.

Like secured personal loans, they require some form of security deposit as collateral and will have higher interest rates. You’ll need to plan ahead for this option so you can gather a security deposit and wait to be approved. It’s a good option to choose as backup in case you need it later.

Secured Mastercard From Capital One

Secured with a small minimum deposit of $49 (or more depending on creditworthiness), even people with poor credit ratings can qualify for this credit card. Interest rates sit at 24.99 percent, and there is no annual fee.

Indigo Platinum Mastercard

This unsecured credit card might be suitable for people with a bankruptcy in their recent history. Depending on credit score, the card comes with a $0 to $99 annual fee and has a 23.9 percent interest rate. It also offers a prequalification process to avoid unnecessary credit pulls.

Are There Good Payday Lenders?

Finding a reputable payday lender can be remarkably challenging, and it varies depending on local regulations. Thankfully, the federal government has recognized the real need for some sectors of society to have easy access to short-term financial assistance.

The federal government has backed the Payday Alternative Loans (PAL) program, which is available through the National Credit Union Administration (NCUA). Member credit unions provide small loans (under $1,000), with terms of six months or less. Importantly, they come with only a small, one-time fee up to $20.

Getting Out of the Payday Loan Spiral

Perhaps you’ve already gotten trapped on the payday loan treadmill and are struggling to escape. You are not alone; 12 million Americans take out payday loans every year. What can you do to get back on track with your finances – and ultimately out of a payday loan debt?

• Consider refinancing your current loans. This usually reduces your monthly payments and saves you money over the long term with lower interest payments.
• Cut back on daily expenditures. Consider canceling unnecessary utilities, like cable, the internet, and cellphone for the time being.
• If the total payday loan is small, consider borrowing money from a close friend or family member. This takes the pressure off the downward debt spiral and allows you to get back on your feet.
• Speak with a financial advisor about filing for bankruptcy. Bankruptcy is a difficult decision to make, but it can be a wise financial one depending on your circumstances.