7 alternatives to payday loans

Tight cash flow is no joke. It's one of the most stressful situations to be in.

Financial worry is a daily stress, according to respondents from our state of employee financial wellness report. Bills, essentials, and trying to save for the future? In addition to all of that, you might have bad credit or no credit score, which makes it harder to get the funds you need fast.

It can also mean a lack of focus and zero motivation at work. 

A seemingly enticing option for getting money you need quickly is a payday loan. A payday loan is a high-interest option paid back in full by the next pay period. But it doesn't usually work out that way.

Before you sign up for a payday loan, or any of the other high-interest loans out there, take a moment to read about them and some other options. 

This blog will guide you through: 

• What a payday loan is
• Drawbacks to payday loans
• 7 key alternatives to try instead of payday loans 
  
  

What is a payday loan?

A payday loan is a short-term but high-interest loan meant to be paid back by or before the borrower’s next payday. Payday loan lenders don’t really require borrowers to verify anything beyond their income, a bank account and identification. 

This has become an accessible  option for anyone struggling with their finances. This includes often vulnerable or at risk populations like new arrivals to the United States who don’t have credit, or anyone who filed for bankruptcy and is at zero credit, and folks with not great credit scores. 

You don’t need to go into a lending location to get the funds. Many payday loan lenders have gone digital, meaning you get funds instantly. 

The biggest flashing red light over a payday loan is a borrower must sign a contract to get the loan. High-interest rates are written into the contract. Loans are most often expected to be paid back in full by the next payday or the interest kicks in. The reality is many borrowers can’t pay back even a small loan in full by the next payday and are caught in a cycle of high-interest and debt. 

The drawbacks of payday loans

Now that we've unpacked what payday loans are all about, let's discuss their disadvantages.

Payday lenders charge high interest rates

A payday loan not paid back in full will have incredibly high-interest. Usually lenders will charge you between $10-$30 for every $100 you borrow. If we calculate that on an annual percentage rate (APR) basis, which is what we use for credit cards, we're looking at between 400 - 600%.

For reference, the APR for a credit card is anywhere from 12 - 25%.

Payday lenders and overdraft 

Some payday lenders require access to your bank account to withdraw repayment. But a withdrawal in an overextended account can cost you. If you don't have the funds, your bank will charge an overdraft fee. 

This may not seem like a big deal but it depends on: 

• Your withdrawal charge from your bank
• How much is in your bank account
• How often a payday lender tries to get repaid
  
  

Payday lenders and ruthless repayment 

Payday lenders are debt collectors, and they can be ruthless.

If you fail to get a rollover or are late on your payments, you may: 

• get phone calls at all hours, even at your place of work, or to family and friends
• see attempts at bulk or incremental withdrawals from your bank account
• receive letters from their law firm demanding repayment
  
  

How payday loans continue the cycle of debt

While most payday loans will get you the money you need fast, the long-term costs are too much of a risk. Let's say you sign a payday loan agreement and borrow $500. 

The typical repayment period is two weeks or one pay period. In other words, you have two weeks to pay back your loan and any accrued interest, or about $75 - $100, for a total of $575 - $600. 

If you can't make your payment, then you need to ask your lender for what's called a rollover. These are all structured differently but you typically have to pay off outstanding fees, the principal amount and any additional fees.

This is how payday loans can push you even deeper into the debt cycle.

The payday loan debt cycle

Here's how you turn $500 of debt into $700 of debt in just one month.

1. Take out a two-week payday loan of $500, with a $20 fee for every $100 borrowed
2. Miss your payment and pay a rollover fee of $100 (paying outstanding fees for the $500 borrowed)
3. Pay off your loan on week four ($500 + additional $100 in fees)

It's easy to see how so many people get trapped trying to pay back their loans. For example:  

• 20% of borrowers default on payday loans
• Over 50% of borrowers who took out installment loans from an online direct lender defaulted on their balance
• 80% of borrowers tracked over 10 months re-borrowed or rolled over payday loans within 30 days
  
  

7 alternatives to payday loans that don't need a credit check

Here are 7 alternative options to payday loans that don't need a credit check and won’t charge you in exorbitant fees.

1. Credit unions

Credit unions consider your income and credit score for a loan application but they also factor in your history as a member. If you're in good standing—even if you have less than ideal credit—you still might qualify for a loan.

Some credit unions offer payday alternative loans in the neighborhood of $1000 - $2000. Interest rates are likely to max out at around 28%, and you'll have a year to pay them back in full.

Credit unions will report late payments to the major credit bureaus. They'll also report when you make payments on time, which helps you establish a good credit history and improve your credit score.

2. Community development financial institutions (CDFIs)

A CDFI is a privately held financial institution that typically serves lower-to-middle class communities. Many offer small-dollar loan programs, which are short-term, low-cost loans of $2,500 or less. You can't apply for a small dollar loan if you currently have one open.

Money is typically borrowed in increments of $100 and fees are minimal. For example, there may be a $5 flat fee for the entire loan. Small-dollar loans have a maximum APR of 36%.

While many small-dollar loans require a credit check, some don't. Other documentation needed includes:

• proof of legal age
• an active checking account
• a positive account balance with regular deposits
• proof of income
  
  

3. Peer-to-peer lending

Peer-to-peer lending has been around for a while. Instead of borrowing from an institution, you can borrow from another person. For example, Upstart allows you to take out online loans of $1,000 - $50,000 at an APR of 6.5% - 35.99%. Those with bad credit or who don't have a credit score can also use the service and many others like it.

If you do decide to look into peer-to-peer lending, shop around and look for early payoff penalties, terms, origination fees, late fees and APR.

4. Personal loans from family or friends

When you're in a bind, sometimes the best thing to do is turn to friends and family. Sometimes you don't have a choice. It beats falling into a debt spiral and potentially having to ask loved ones for even more money further down the road. Personal loans generally come with low to no interest. They also usually don't include late payments. 

5. Salary advance

If you're struggling with cash flow and eyeing bad credit loans that could burn you in the long run, consider talking to your payroll manager or employer. They might be able to advance your next paycheck or a portion of it to help you cover near-term expenses.

Employers are not legally allowed to profit from payroll advances, so asking for a salary advance is not the same as a loan request. That said, they can charge a small fee or interest rate to cover accounting. Some might need you to provide a reason for taking out an advance, while others might not. Whatever the case, it's always a good idea to get clarity on the terms before proceeding.

6. Earned wage access (EWA)

Many businesses today are offering employees access to their earned wages via pay on-demand, or earned wage access. With EWA, employees don't have to wait around for payday if they need the money beforehand. 

EWA doesn’t require a credit check or a good credit score because it is backed by your employer. Many EWA providers are connected through payroll. You simply take out the amount you need from the percentage available to you and it’s repaid from your paycheck. 

For example, if your biweekly paycheck is $1500 and you need $200, what you’ll receive on payday is $1300. If there’s a fee, which in some cases there are, you might be a few dollars shorter. ZayZoon, for example, charges a flat $5 fee per instant transaction but also offers fee-free payout options such as gift cards. 

ZayZoon’s EWA was created as a solution to predatory payday loans. It was esigned to help everyone manage unexpected expenses or cash flow issues without the need to take out high-interest payday loans or incur overdraft fees from banks. 

7. Installment loans

You may qualify for installment loans, even if you have bad credit. Bad credit borrowers will likely have to pay higher interest rates but installment loans allow you to instantly borrow money for an item you're purchasing. To pay off the loan, you make regularly scheduled payments, or installments paid every week, month or year. Once you've paid back your loan in full, the account is closed.

These are some of the most common installment loans that might be available to you.

• Auto loans: An auto loan is a secured loan because the car functions as collateral. In the event you can't make the payment, your car can be taken instead. Typically, these loans have fixed interest rates with a repayment period of up to seven years.
• Mortgages: Mortgages for a house you buy are repaid over several years, even decades. Like auto loans, they are secured. It's also worth noting that to take out any loan amount, you'll need a good credit score.
• Student loans: Unlike the first two loans mentioned above, student loans are unsecured loans. Usually, you don't have to worry about paying them back until after you've graduated college, and often they come with interest charges. 
• Personal loans: Most personal loans are unsecured loans, though you can put up your house or car as collateral. They can be used for a number of different reasons, like making home or car payments, consolidating outstanding debt, or paying off unanticipated bills.

There are a lot of other resources available to you beyond payday loans. Emergencies happen, debt can be necessary, so it’s not shameful to seek out additional ways to ensure you can pay to live your life and keep yourself afloat. 

Tailored financial education and toolkit 

ZayZoon’s Money Mindsets Quiz helps you understand your financial habits, strengths and areas of improvement. The 20 question quiz identifies your unique money personality and provides easy-to-understand financial knowledge and recommendations.

It is designed to help you better understand your relationship to money and how to work through areas of improvement to amplify your financial strengths.  Each spending profile includes steps you can implement the same day to reach your financial goals along with the tools to make it happen. 

Take the quiz to get started.