Four Safer Alternatives to Payday Loans and Payday Advance Apps
If you’re struggling to pay your bills, there’s some comfort in knowing you’re not alone. The federal minimum wage remains at $7.25 an hour , a figure set in 2009. The highest local minimum wage in the country is found in the District of Columbia, where the minimum wage is $17 per hour . That sounds great until you consider that in 2022, the cost of living for a family of four with two working adults was considered to be $25 per hour , and the average hourly wage for US workers was just $11.21 .
So it’s no surprise that so many people are looking for cash and considering a payday loan. Payday loans have some superficial benefits for busy and stressed-out people: they’re convenient, fast, and offer small loan amounts that seem doable in the short term. The problem is that they are also predatory: Some payday loans have annual percentage rates (APRs) as high as 652% , many of them offered by Indian tribes that don’t have to comply with federal loan terms laws. Even borrowing a small amount on a payday loan can quickly turn into unaffordable debt, forcing you to borrow more to stay afloat.
If you need quick money and are considering taking out a payday loan, don’t do it. Instead, look into one of these safer alternatives.
Alternative payday loans
If you’re in need of short-term loans, it may be time to join a credit union . These organizations are member-owned and operate on a not-for-profit basis, and credit unions that are part of the National Credit Union Administration (NCUA) offer a great option called a payday alternative loan (PAL) . There are two types of PAL (PAL I and PAL II); the latter option is your best choice if you are not already a member of the credit union, since you are eligible as soon as you join (you must be a member for at least a month to receive a PAL I loan).
PAL loans finance from $200 to $2,000 and charge a maximum application fee of $20 (some credit unions may charge no fee at all) with terms ranging from one month to a year. The APR will vary depending on your loan, but will not be higher than 28%. An annual interest rate of 28% is certainly not that great, but it is much better than 652%. Participants can take three PAL I credits over a six-month period, but can take as many PAL II credits as needed—as long as you meet the criteria.
Bank loan
If you can’t find a credit union in your area, check to see if local banks offer bad credit loans or small dollar loans:
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Bad credit loans are exactly what they sound like: loans designed for people with bad credit. The APR on these loans will be high (up to 35.99%), but not as astronomical as a payday loan, and in some cases they will finance as little as $300. Keep in mind that these loans may come with other fees , and there are predatory lenders offering similar personal loans. Consider this option only in a reliable bank with a good reputation.
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Small dollar loans are regular bank loans, but they are issued in much smaller amounts than regular consumer loans. For example, Wells Fargo offers existing customers a flexible loan of up to $500 for a flat fee repayable over four months, and U.S. Bank allows its customers to borrow from $100 to $1,000 with a flat fee of $6 for every loan borrowed. $100 refundable within three months. months. It may be worth checking to see if your bank offers a small dollar loan, as this is a much cheaper option than a payday loan.
Peer-to-peer loans
Peer-to-peer (P2P) loans are funded by investors and are generally easier to obtain than bank loans, although they often charge an origination fee, just like a bank. Lending Club is a popular P2P lender that offers loans starting at $1,000 at rates as low as 35.99% .
Lending circles are another form of P2P loan to consider, although they may take longer to obtain and therefore may not be suitable for emergency situations. A lending circle is a private group that deposits money into a fund and then offers its members either zero-interest loans or regular payments. There is a regular membership fee and you must already be a member to access loans from Lending Circle, but it can be a good alternative if you have a regular need for small loans.
Salary advance
Finally, you may want to consider asking your employer for a small advance towards your salary. However, you should avoid payroll access apps like DailyPay or EarnIn (which some employers already offer as a “benefit”). These types of loans have some of the same disadvantages as payday loans : they can trap you in a bad cycle where you always fall short on bills and constantly borrow more, they also charge fees and can lead to overdrafts on your accounts. If your employer offers advances without a fee (or for a nominal fee), this could work for a one-time emergency if you make a plan for the smaller salary that comes your way so you don’t have to borrow again.