Alternative Lending: 3 Payday Loan Alternatives

Alternative Lending: 3 Payday Loan Alternatives

From Karla Lopez

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Payday loans are a great option when you need money fast and don’t want to get stuck in monthly repayments. 

Even though they tend to be predatory, they are still a big help to get out of a financial pinch, and predatory payday loans are rare nowadays and very obvious to spot if you know the signs. 

Payday loans only become a burden when mishandled. However, they are not necessarily the best option when you need financial help. They are expensive and tend to trap you in a debt cycle. But before we discuss the different options you can opt for instead of a payday loan, let’s talk about what payday loans are and how they work.

What is a Payday Loan, and How Does It Work?

A payday is a type of short-term loan where a lender charges a high-interest rate depending on your income. The principal is calculated based on a percentage of your salary added with interest. The interest rates are typically high because it’s a short-term and unsecured loan, which means it doesn't require collateral.

Payday loans are usually meant to be paid in one lump sum on your next paycheck, and the interest is fixed because of this. Most lenders don’t even call it interest but instead treat it as a fixed flat fee, ranging between $10-$30 per $100 that you borrow. The best thing about them is that they are common both in physical branches and online. 

Both methods offer credit applications with approval as fast as the next day. You can get your money typically within a week or so. Now that we know how payday loans work, let’s talk about their alternatives.

Bad Credit Loans

This one is good for people with bad credit who can’t get a traditional loan. These are typically used for unexpected expenses such as emergencies, car repair, etc. 

Bad credit loans can be obtained through traditional banks and lenders since they are a type of personal loan. However, personal loans often have strict requirements such as a good credit score, clean credit history, etc. Banks offer bad credit loans, but they may come with many restrictions, longer approval time, higher interest rates, etc.

Pawn Loans

The least risky among the loans lenders market with fast and easy access to cash are pawn loans. Interest rates for these loans are generally lower than the regular payday loans, but the state often regulates them. While payday and car title loans can have an APR of up to 400%, pawn loans only have around 200%.

If you want to go for this option, you should have something valuable to exchange for the loan. It will serve as collateral and be the basis of the amount you will borrow. Before offering you a loan, the lender will assess the item’s market value, resale potential, and overall condition.

If you accept the offer, you will get the money and pawn ticket which you can present to the staff when you want the collateral back. Pawn Shops typically offer an amount between 25% to 60% of the collateral’s value. So it would be wise to shop around for a pawn shop first.

Since pawn loans are secured loans, they require little to no credit check, but you must be 18 years older before starting a transaction with them. Also, all pawn shops have regular contact with the authorities, which they will contact in case of potential theft. 

In some instances, pawnshops will require proof of identity and ownership of the item. High-demand items are often jewelry, electronics, firearms, tools, and musical instruments.

Credit Union Loans

If you’ve been an existing member of a credit union for some time, credit union loans might be the answer to your current financial burdens. 

Credit union loans also do a credit check, but the main factor they look into is your relationship with the organization, credit history, and income. They have the same loan products and services as traditional banks. 

Still, they offer lower interest rates and have overall better repayment terms, especially if you have a good standing in the organization. So whether you’re looking for personal loans in Washington DC or bad credit loans in New York, you can usually look for them in your local credit union if you’re a member.

Final Words

Payday loans are convenient for seeking a fast and easy way out of a financial pinch. But they are often not the best choice and not to mention that they tend to have a bad reputation. So if you are looking for some alternatives, you might want to try one of the options mentioned in this article.

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