Payday loan alternatives: Which option Is best for you?

If you're short on cash and need to cover an urgent expense that can't wait until you get paid, a payday loan may be appealing, particularly if you have bad credit. However, a payday loan is one of the most expensive ways to borrow money, typically costing $15 per $100 lent over a two-week term—nearly a 400% annual percentage rate (APR).

Plus, as the name implies, the loan is short-term, and you must repay the debt with your upcoming paycheck, reducing your available cash to cover the next round of bills. As a result, you may find yourself in a hard-to-escape debt cycle, always needing a payday loan just to make ends meet.

Fortunately, there are several cheaper alternatives to payday loans you can consider that will help you save money and stabilize your finances faster. 

Payday loan alternatives

Financial assistance programs

If you’re experiencing financial hardship, the best option is to avoid borrowing money altogether. Financial assistance programs might be able to help you pay your rent, utilities, and other bills. You may be able to find information about assistance in your area by visiting your local library, Chamber of Commerce, or charitable organization, or by searching online.

Payment plans

If you're about to miss a payment on a bill, contact your service provider or creditor and explain your situation. The company may be able to help you avoid delinquency and default by offering to lower or postpone your required payments, giving your budget some breathing room. Beware, however, that you may get charged a fee on top of any interest that will accrue.

Payday alternative loan (PAL)

Federal credit unions offer PALs—which, unlike traditional payday loans, are regulated. With a payday alternative loan, you can borrow up to $2,000 with a 12-month repayment term and an APR of 28% or less. You must be a credit union member to qualify for a PAL, and you may have to pay an application fee of up to $20 to receive funding. 

Peer-to-peer lending loan

With a peer-to-peer loan, you borrow from an individual, not a bank, with the transaction generally facilitated by an online platform. You request a loan, and participants on the platform can choose to lend you money. 

While a peer-to-peer loan may be easier to obtain than a traditional personal loan, you still have to meet qualification criteria and pay interest and fees. Reputable platforms include Prosper, LendingClub, and Upstart. 

Personal loan

A personal loan gives you cash in a lump sum that must be repaid in installments, generally over a 1 to 7-year term. You may have to pay fees to secure funding, and your APR could be relatively high (in the mid-30s) if you have a blemished credit history. 

If your credit is really flawed, you may need to shop around to find a lender who specializes in low credit scores. It's also worth checking with your bank or credit union to see their available options. 

Paycheck advance loan

A paycheck advance loan is exactly how it sounds. You receive a portion of your expected earnings before payday, typically up to $500. However, it’s important to note that this reduces the amount of your actual paycheck. Well-known platforms include Chime and Dave.

401(k) loan

A 401(k) loan isn't a traditional loan because you're borrowing from yourself instead of a lender. If your employer's retirement savings plan permits loans, you may be able to borrow the lesser of $50,000 or 50% of your account balance for up to five years without a credit check.

While this may seem like easy money, going this route has significant downsides. First, any cash you take out of your account won't benefit from compound interest, leaving you with fewer dollars to spend in your golden years. Failing to make catch-up contributions could lead to a serious retirement shortfall. 

Plus, if you leave your employer, the remaining debt could become due almost immediately. If you don't repay the loan in full by the deadline, what you owe will be deducted from your account balance. You'll then be taxed on the amount deducted as though you had taken a distribution of the funds, and you may be charged an early withdrawal penalty if you're under the age of 59.5. 

Home-equity backed loans

If you’re a homeowner with sufficient equity, you may be able to tap into your home's equity (what the residence is worth, less what you owe on it) to generate cash flow. Two of the most popular options are the home equity loan and home equity line of credit (HELOC).

With a home equity loan, also known as a second mortgage, you borrow a lump sum and start repaying the debt in installments right away. Generally, your loan will have a fixed interest rate, resulting in predictable monthly payments over a 5 to 30-year term. 

A HELOC is also considered a second mortgage, but it functions more like a credit card than a loan. During the draw phase (generally 10 years), you can borrow up to your credit limit and typically only need to pay the accruing interest. During the repayment phase, which lasts for the remainder of the loan term, you can no longer borrow and must make principal and interest payments until your balance is gone.

HELOCs generally have a variable interest rate, so your monthly payments can change. 

To qualify for a home equity loan or line of credit, you’ll need a credit score above 620, 20% equity, and sufficient income. 

Home equity financing provides some of the largest loan amounts on the market, and typically at more favorable rates. However, the biggest downside of tapping equity is that since the property secures the debt, you could lose your house if you don't make payments as agreed.

Home equity investment

A home equity investment (HEI) helps you access your home's equity without having to meet strict financial criteria or make monthly payments. With an HEI, you get cash upfront in exchange for a portion of your home's future appreciation (that’s change in value, not total home value).

You'll have a flexible 30-year term, and can settle the investment at any time through a home sale, refinance, or using another source of funds.

Homeowners generally need a credit score above 500 and sufficient equity to qualify. There are no income requirements.

Frequently asked questions

What is the best alternative to a payday loan?

The best alternative to a payday loan is usually a small personal loan from a credit union or community bank, or a paycheck advance from your employer—these options often have much lower fees and friendlier repayment terms. If your situation is more dire, it's best to explore hardship grants or programs.

How to borrow $200 until payday?

If you just need $200 to tide you over, consider a small cash advance app, a paycheck advance from your employer, or even asking a trusted friend or family member; these can help you bridge the gap without the high costs that come with payday loans.

Where to go when no one will give you a loan?

If you can’t qualify for a traditional loan, look into local nonprofits, community assistance programs, or credit unions that offer small-dollar emergency loans—and don’t overlook asking your utility company, landlord, or creditors about payment plans or hardship programs that can help you manage bills without borrowing at high interest.

Final thoughts

It's stressful not to have the money you need. Payday loan lenders exploit that desperation by charging a high APR. Fortunately, with some research and effort, you can secure funding in other, less expensive ways.