Payday Loan Alternatives Checklist

Payday Loan Alternatives

Payday loans are not the only option for consumers with bad credit. Other options do exist and most financial counselors will direct people to explore the alternatives.
Other options are available to most payday loan customers. These include credit union loans with lower interest and more stringent terms, credit payment plans, paycheck cash advances from employers, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans and direct loans from family or friends.

Payday lenders do not compare their interest rates to those of mainstream lenders. Instead, they compare their fees to the overdraft, late payment, and penalty fees that will be incurred if the customer is unable to secure any credit whatsoever.

The lenders therefore list a different set of alternatives (costs expressed here as APRs for two-week terms):

$100 payday advance with $15 fee = 391% APR;
$100 bounced check with $48 NSF/merchant fees = 1,251% APR;
$100 credit card balance with $26 late fee = 678% APR;
$100 utility bill with $50 late/reconnect fees = 1,304% APR.

Variations on payday lending
A minority of mainstream banks offer advances for customers whose paychecks or other funds are deposited electronically into their accounts. The terms are similar to those of a payday loan; a customer receives a predetermined cash credit available for immediate withdrawal. The amount is deducted, along with a fee, usually about 10 percent of the amount borrowed, when the next direct deposit is posted to the customer's account. After the programs attracted regulatory attention, Wells Fargo called its fee "voluntary" and offered to waive it for any reason. It later scaled back the program in several states.

Income tax preparation firms often partner with lenders to offer "refund anticipation loans" to filers. These loans are not technically payday loans (because they are repayable upon receipt of the borrower's income tax refund, not at his next payday), but they have similar credit and cost characteristics. A car title loan is similar to a payday loan, but it is secured by the borrower's car. These loans are available only to borrowers who hold clear title (i.e., no other loans) to a vehicle. The maximum amount of the loan is some fraction of the resale value of the car. These loans may be available on slightly better terms than an unsecured payday loan, since they are less risky to the lender. If the borrower defaults, then the lender can still recover costs by repossessing and reselling the car.

Payday Loan Alternatives CheckList 

Payday lenders are not the only alternative there is for consumers facing debt problems. Payday loans were legalized in California two years ago. Consumers obviously managed to deal with their debt for decades before anyone had heard of payday loans. Here are some suggestions if you are looking for an alternative to a payday loan.

Try to negotiate a payment plan with your creditors. The best alternative to payday loans is for consumers is to deal directly with their debtor. Most creditors will arrange to accept partial payments if one sets up a payment plan. Consumers can negotiate such plans themselves or contact their local nonprofit Consumer Credit Counseling Services (CCCS) office for help on doing so. Paying off your debts through a payment plan, rather than taking on even more debt at exorbitant interest rates, is the best way to deal with your financial problems. CCCS offices also teach money management skills to help consumers prevent having financial problems in the first place.

Handling your credit cards or secured credit cards. Some credit card companies only deal with consumers with financial problems or poor credit histories. Consumers should definitely shop around and not assume they don't qualify for a credit card. Secured credit cards are another option too. A secured card is basically a credit card tied to a savings account ($500 woud be an example). The card's credit line is the amount deposited in your savings account. The funds of the account "secure" the amounts charged on your card. Once a consumer has successfully used the secured card for six months to one year, they can then qualify for a regular unsecured credit card.

Try advances from employers. Many employers will grant paycheck advances to their employees. Because this is a true advance, and not a loan, it is obviously is a better alternative than payday lenders.

Try credit unions. Credit unions offer small, short-term loans to all their members. Many more consumers can join credit unions for as little as a $5 deposit now that affiliation requirements are not as strict.

Get overdraft protection. These days, most banks offer checking accounts with overdraft protection. Payday lenders say their fees are lower than paying bounced check fees, but a better alternative is to prevent the bounced check fees in the first place.

Get lines of credit from finance lenders. Finance lenders such as Household Finance offer small lines of credit to consumers with less than perfect credit histories. These credit lines range from $2,000-$5,000 with high interest rates however, from 25-35% APR.

These are a few of the best payday loan alternatives that we know of. We will add to the payday loan alternatives checklist as we discover more.