What is Better Than a Payday Loan? The 10 Best Alternatives to Escape Debt Traps
- Published on -
- Written By - Alex Hales
- Reviewed By - Zack M. Disette
Loans that are classified as payday loans may feel like they can help cover an immediate need for cash, but with APRs over 400%, and a high chance to fall further into debt, they often worsen financial difficulties.
The good news is that payday loans can be made easier for people who wish to opt for an alternative. There are many strategies that can be utilized to refrain from taking out a payday loan, all of which include step by step tips with real life examples along with case studies that incite motivation.
Best 10 Alternatives better than Payday Loans:
1. Personal Loans from Banks or Credit Unions.
Solution: Lower the interest on fixed term loans and ask for a personal loan instead.
Example: John required 5,000 dollars for home repairs that were considered urgent. Instead of applying for a payday loan, he got a personal loan with a term of 3 years and an APR of 12%, which helped him save thousands in interest.
Tips :
- Always check your credit score beforehand.
- Aim to have a credit score that is 650 or higher.
- Seek online lenders or nearby credit unions.
Case Study: Sarah, who works as a teacher, was able to borrow 3000 from her credit union at an interest of 10 percent which she managed to pay back easily. She paid 100 each month for 3 years.
2. Credit Union Pay Day Alternative Loans (Pal's).
Solution: Joining a credit union can allow someone to borrow a Pal of up to 2000 dollars.
Example: Mike, who needed additional money for car repairs, was able to get his Pal loan but only required 1200 dollars. His Pal loan cost him 60 dollars in interest as opposed to the 450 dollars he would have to pay under a payday loan.
- Look for credit unions that are insured by the government and offer Pal’s.
- Be aware that to become a member, you may need to make a small deposit like 25 dollars.
Case Study: In six months, Lisa paid off a PAL loan used to settle medical bills with little interest after an emergency.
3. Borrow from Friends or Family
Solution: Family and friends are likely to help if a feasible repayment plan is discussed.
Example: Emily avoided a payday loan by borrowing $800 from her sister, who agreed to let her pay back $100 per month.
Tips:
- Set terms in a written document to avoid confusion later on.
- As a show of good faith, borrowing with a small amount of interest (2-5%) can help sweeten the deal.
Case Study: Tom’s relationships remain intact after he paid his brother $1,500 over 6 months, plus his finances improved.
4. Negotiate Payment Plans with Creditors
Solution: Reach to service providers and request an extension on deadlines or lower payments.
Example: Maria negotiated her 2,000 medical bill into 12 monthly payments of 170.
Tips:
- Be straightforward. Explain your hardship and propose terms that are realistic.
- Consider interest-free arrangements or fee waivers.
Case Study: David split his $600 utility bill into 3 payments and avoided a payday loan.
5. Nonprofit Credit Counseling
Solution: Work with a certified counselor on a Debt Management Plan (DMP).
Example: A counselor from the National Foundation for Credit Counseling (NFCC) helped Mark to reduce the APR on his credit card from 24% to 9%.
Tips:
- Avoid agencies that charge fees upfront.
- DMPs can be used to consolidate debt into one affordable payment.
Case Study: Over the course of 4 years Lisa paid off $15,000 in debt through a DMP saving her around $200 a month.
6. Credit Cards With 0% APR
Solution: Pay down existing debts using a 0% intro APR card (within 12-18 months).
Example: Kevin was able to pay his $3,000 emergency vet bill over 12 months without paying a cent of interest.
Tips:
- Achieve a credit score of 670 or higher to qualify.
- Ensure that the balance is paid off before the promotional period comes to an end.
Case Study: Rachel used a 0% APR card to pay for her car repairs which saved her from paying 600 in payday loans.
7. Freelancing or Other Short-Term Employment
Solution: Earn cash fast by selling services or taking on ride-sharing jobs.
Example: Anna made 500 dollars in a week simply by dog walking on Rover.
Tips:
- Turn your hobbies into side gigs e.g. tutoring or crafting.
- Hire through Task rabbit or sell on Fiverr.
Case Study: Jake drove for Lyft during the nights and on weekends earning around 1200 dollars a month which helped him get out of debt.
8. Establish an Emergency Fund
Solution: Set aside a small amount at first, 500, then 1,000 to use as an emergency buffer.
Example: Rachel set up auto save at 50 dollars a week and ended up building a 1,000 dollar fund in 5 months.
Tips:
- Put money aside using apps like Digit.
- Store the funds in a high yield savings account.
Case Study: After 2 years Maria was able to cover her abrupt job loss with her 3000 dollar emergency fund.
9. Sell Items You Don’t Use Anymore
Solution: Remove clutter from your home and sell items using Facebook Marketplace, eBay, or local pawn shops.
Example: Within a week, Emma was able to sell an old laptop, pieces of jewelry, and furniture items, totaling to $1,000.
Tips:
- Use clear and appealing photos when advertising your item and ensure prices are set competitively.
- Faster sales can be achieved by using local buy/sell groups.
Case Study: Dave was able to pay off his dental bill by selling his guitar and camping equipment.
10. Government or Community Assistance
Solution: Apply for SNAP, LIHEAP, or any local rent help programs.
Example: Carlos was able to receive $400/month via SNAP, which freed up additional money to put towards his rent.
Tips:
- Go to Benefits.gov to check if you are eligible.
- Work with non-profit organizations such as United Way.
Case Study: A single mother, Priya, was able to cover her heating bill with her LIHEAP benefit, which helped her avoid a payday loan.
Final Tips to Stay Payday-Loan-Free
- Plan Ahead: Start an emergency fund, even if saving $10/week, it will build a fund.
- Boost Credit: Raise your availability for better loans by paying bills on time.
- Seek Help Early: Reach out to creditors or counselors pre-crisis for assistance.
These alternatives will assist you in escaping predatory debts and regaining control over finances. Remember: short term sacrifices will lead to long term stability!
