Emergency and payday loan alternatives that could save you money

Payday loan alternatives offer safer options to borrow the money you need than payday loans. Payday loans, often marketed as emergency loans, are predatory loans that allow you to get fast cash but must typically be repaid by your next payday. While instant cash flow can be enticing if you’re tight on money, these loans have exorbitant interest rates that may leave you trapped in a debt cycle for years.

Alternatives to payday loans

You should consider the many alternatives before taking out a payday loan. This list includes options for those with bad credit or who need to reduce their monthly loan costs.

1. Get help from nonprofits and charities

Best for those who can meet an organization’s qualifications to receive assistance.

Some not-for-profit and charity organizations offer financial assistance to those in need. Financial help from a nonprofit is a no-strings-attached gift you don’t have to pay back. That said, the funds may also be reserved for certain groups, such as older people, those who are currently unemployed and those with disabilities or chronic illness. You might also have access to financial resources and training, like job training, educational workshops and mentorship opportunities.

2. Reduce your medical bills

Best for those who have a substantial amount of medical debt.

Sometimes, all it takes to lower your medical bills is a phone call to the medical facility or hospital’s finance department. While it’s not always guaranteed, some offer payment plans or hardship relief opportunities for those in a financial bind or who have experienced a sudden loss of income.

In some cases, you may even be able to score an interest-free plan or partial debt forgiveness. But it could take some time to hear back from the company or the financing department.

If this approach doesn’t work:

• Consider working with a medical billing advocate. These professionals can review your medical bills, explain benefits and check your bills for errors. They typically charge a percentage of the amount they saved you on bills, although some nonprofits offer this type of advocacy free of charge.
• Use a medical credit card to get immediate relief. This option should only be used as a last resort to cover medical expenses,  as interest can quickly add up if you cannot make the monthly payments. However, a credit card can give you a few more weeks to find the funds or find another solution.

3. Negotiate a payment plan or extension

Best for those with a solid history of making on-time payments on their loans and credit cards.

Your lender may offer a payment plan or an extension to make your debt payments more manageable. The first step is calling the lender or checking the website to see if a relief option is available. Some lenders offer their customers a hardship program, but make sure this is even offered — and that you qualify — before banking on alternative payment options.

Here are a few examples of how a lender can provide financial hardship assistance:

• Come up with a repayment plan.
• Lower your monthly payment.
• Stretch out your repayment period.
• Temporarily pause your payments.
• Waive fees.
• Reduce your interest rate.

4. Get an advance on a paycheck

Best for those who need money immediately and don’t have the best credit.

Your employer may give you the option of a paycheck advance loan, which allows you to access all — or part — of your next paycheck before your expected payday. Most of the time, you’ll have a borrowing limit of up to $1,000. Because you’re borrowing against your paycheck, you’ll be making less and will need to repay the balance prior to your next payday.

If your employer doesn’t offer this option, you can turn to an early payday app, also called a cash advance app. Many apps charge few fees and carry low interest, especially compared to payday loans. Like employer advances, early payday options require you to repay the full balance on your next payday.

If you regularly rely on payday advances, it could lead to unhealthy spending habits, so be cautious.

5. Take out a personal loan

Best for those with strong credit (or a co-signer) and a stable income.

There are both pros and cons to a personal loan. You can use them for many purposes, including buying groceries or paying bills if you’re in a financial pinch. A strong credit score generally means you’ll qualify for an unsecured loan and good rates, assuming you meet the other lending guidelines. But if you have poor credit, you may be limited to poor rates on an unsecured loan or a secured loan that requires you to put up property or an asset as collateral.

Secured loans are riskier, since you could lose your collateral if you default. They could also take longer to fund since the lender must assess your property’s value. But they often come with much lower rates than payday or other types of emergency loans.

Before applying for a personal loan with bad credit, read the lender’s website or check with the customer service department to ensure it meets your needs.

Consider a Payday Alternative Loan (PAL)

Payday Alternative Loans (PALs) are small loans some federal credit unions offer. They typically amount to under $2,000 and are repaid over the course of a few weeks to a few months, depending on the credit union’s PAL details. These unsecured loans aim to provide credit union members with a lower-cost alternative to predatory payday and emergency loans.

There are two types of PAL loans:

• PAL I: It comes with a maximum APR of 28 percent, and you must be a credit union member to qualify.
• PAL II. The maximum APR is also capped at 28 percent, but credit union membership is required for at least one month before you’re eligible for a loan. However, you could access a higher loan amount and lengthier term.

6. Apply for a 0 percent APR credit card

Best for those who have good credit and are confident they’ll pay off the balance before the introductory period ends.

If you have strong credit, you might be able to get approved for a 0 percent APR credit card. Great for debt consolidation, these credit cards feature an introductory period — typically up to 15 months — where no interest is charged on transferred balances. Zero percent cards don’t eliminate the debt, but they can give you time to repay debts without them growing.

You should only use this method if you’re positive you can repay your debts within the 0 percent period. Once the period ends, interest will start accruing on the unpaid balance.

This doesn’t mean you should cancel the card once you’ve repaid your debt — that could hurt your score. To maintain a robust average account age, use the card for smaller purchases and set up autopay so you don’t accrue interest on forgotten payments.

7. Get a cash advance from your credit card

Best for those who already have a credit card and only need to pay for a small emergency expense.

Alternatively, if you already have a credit card and need to borrow hard cash, you can check if your issuer allows cash advances. These advances differ from advance apps and salary advances, as you’re not borrowing against your salary but your credit limit. Credit card cash advances are a last-resort option. They come with higher fees and APRs than most credit card purchases.

As of November 2024, the average credit card interest rate was nearly 21 percent. On top of this, credit card issuers typically charge an extra cost on cash advances totaling between 3 percent and 5 percent. So, if you take a cash advance of $700 from your credit card, you’ll likely incur a transaction fee between $21 and $35 on top of higher interest rates.

Even so, if you’re in a bind and need money quickly, a credit card advance is still a much safer choice than going with payday loans. Not only are advances cheaper due to lessened interest rates, but they’re also a more practical option, with most offering a longer repayment option than payday loans.

8. Borrow from your 401(k)

Best for those who aren’t retiring soon, have money in a 401(k) account to borrow and have a low credit score.

401(k) loans technically aren’t loans in the traditional lending sense. You won’t undergo a credit check and won’t work with a lender to obtain the money. Rather, 401(k) loans allow you to borrow from the funds you’ve built up in a 401(k) retirement account. Whether you can borrow from this account depends on your employer and the retirement plan they have set up.

The maximum amount you can withdraw is currently $50,000 or 50 percent of your balance, whichever is less, and you’ll have up to five years to repay the balance. If you use your 401(k) to buy a house, there’s a chance that you could have a longer repayment term — up to 25 years. However, if you leave your employer while in repayment, you’ll have just until the due date of your federal income tax return to repay the loan.

Before borrowing, use our 401(k) calculator to evaluate whether dipping into retirement is recoverable and won’t hurt your future finances.

Why it’s best to avoid payday loans

With most payday loans, you’ll get the money upfront and write the lender a postdated check. On your next payday, you’ll make a “balloon payment” — the entire loan amount plus interest and fees — or the lender will deposit the check, and the money will come out of your account.

While payday loans are easy ways to access fast cash, they are also costly. Most come with triple-digit interest rates that can sometimes exceed 600 percent. This, combined with their short repayment period, makes these loans risky.

In fact, this type of lending is illegal in 25 states.

High risk of default

Most payday lenders give borrowers approximately two weeks to repay the loan. Those high rates and fees mean you’ll owe a lot more than you originally borrowed.

That makes payoff hard for many borrowers. In fact, according to the Consumer Federation of America, borrowers default on about 20 percent of payday loans.

If you cannot repay, you’ll default on the loan or incur an additional charge to roll the balance over. However, be aware that in 16 states, lenders must offer no-cost extended payment plans, which can give you a way around the rollover fee.

Steep fees

The fees and interest rates on payday loans are sky-high. For example, the average personal loan rate, as of November 2024, is 12.31 percent. The average payday loan reaches three-digit interest rates.

Plus, you’ll be hit with either late fees or roll-over fees if you don’t repay a payday loan by the time you get your next check. This is why payday loans are so dangerous. The rates alone have the potential to catch you in a vicious spending-and-borrowing cycle.

Potential credit damage

If you reach the maximum number of rollovers and still can’t repay the loan, your credit health could be at risk. The payday lender could report the delinquent balance to the three credit reporting agencies or sell your account to a collection agency.

Either way, your credit score will likely drop due to the negative repayment history. Also, depending on how many days you’re delinquent, you could also face legal action and may have to present in court.

Bottom line

Emergency and payday loans are convenient ways to access fast cash. However, they should only be used as a last resort, as both generally have steep borrowing costs. Instead, explore more affordable payday loan alternatives. Exhaust all other options to avoid becoming entrapped in a vicious debt cycle.