Payday loans really are a very costly way to take a loan when you are facing an economic crisis. When you really need cash urgently, payday alternative loans could be a less expensive solution—and good credit may not be essential to get approval.
High fees associated with getting an online payday loan make them a high-cost option. Not only that, the Consumer Financial Protection Bureau (CFPB) reports that more than 80% of payday loans are rolled over into another loan, which can lead to a debt cycle that leaves borrowers worse off than before you took out the loan.
Payday alternative loans can help you avoid this debt trap and manage your money. Read on to find out more.
What Is a Payday Alternative Loan?
Payday alternative loans (PALs) are offered by a few federal lending institutions being an option for borrowers who might otherwise end up embracing expensive payday loans in desperate situations. Unlike pay day loans which are due entirely by your next payday, PALs are quick installment loans in which you will make payments every month or every other week on the specific loan term.
The National Bank Administration (NCUA) sets rules for PAL terms. Because of this, PALs tend to be more affordable than payday loans: Rates of interest may only be up to 28%, and application fees should be limited to what it costs the loan union to issue the borrowed funds, with a max of $20.
There are a couple of kinds of payday alternatives loans—PAL I and PAL II. Below is a head-to-head comparison of how both work.
| PAL I vs PAL II Loans | ||
|---|---|---|
| PAL I | PAL II | |
| Membership requirement | Must be a credit union member for at least one month before applying | Can apply for a loan as soon as you become a member |
| Loan term | One to six months | One to 12 months |
| Loan amounts | $200 to $1,000 | Up to $2,000 |
Payday Alternative Loan Credit Requirements
NCUA underwriting guidelines don't outline a minimum credit score required to get approved for any PAL, and instead leaves it up to each bank to determine approval criteria. Since PALs are designed instead of pay day loans that are tailored for cash-strapped borrowers who might not have a credit rating, their credit requirements are usually less stringent than other borrowing options.
In some cases, no credit check might be performed whatsoever. Instead, credit unions need to see that the membership is within good standing and that you earn enough income to pay for monthly obligations. To ensure your earnings, you may want to show pay stubs or bank statements. If you are interested in a payday alternative loan, searching the MyCreditUnion.gov website for local credit unions and find out what options might be available.
Loan Alternatives for those who have Good Credit
Other borrowing options offer lower interest rates, higher loan amounts and longer loans than payday alternative loans for those who have a good credit score. Here are some options:
Personal Loans
A personal bank loan might be a way to finance a bigger unforeseen expense, for example an urgent situation medical procedure or car repair. Personal loans from banks, lending institutions an internet-based lenders may offer amounts of as much as $100,000 and loans of nine to 60 months or even more.
0% Intro APR Credit Cards
Another way borrowers with higher credit could bridge an economic gap is by opening up a credit card that offers 0% APR during an promotional period.
A charge card with a 0% intro APR won't accrue any interest for a period of months, and then the card's ongoing APR will start working and apply to any remaining balance. Making equal payments every month to pay off an account balance throughout a 0% APR period might be a money-saving way to purchase a significant expense. Once the intro APR offer ends, the card could still provide great utility, especially if it offers rewards.
Home Equity Loans or Home Equity Credit lines (HELOCs)
If you have a home, you could look at borrowing from the equity. A house equity loan typically provides a set rate, fixed payment and fixed term. HELOCs offer a credit line which you can use and repay when needed.
Interest rates could be low for loans and lines of credit secured by your home—but it is vital that you make sure you can pay the loan back before making use of your house equity. Otherwise, not repaying a home equity loan or HELOC might cause you to definitely lose your home.
Options for those who have Bad Credit
Having bad credit doesn't mean you're limited to pay day loans or payday alternative loans when you really need to gain access to cash. Some lenders are willing to work with borrowers who have less-than-perfect credit, and may use alternative data points, such as grade point averages, history of employment and standardized test scores, to help approve borrowers.
You could also consider using a peer-to-peer lending platform where peer investors fund loans for borrowers. An alternative choice could be joining a formalized lending circle where categories of people come together to conserve and lend money to each other.
Find the very best unsecured loans in Experian CreditMatch™.
The the easy way find options and compare borrowing costs is as simple as looking around. Using Experian CreditMatch™, you will get personalized offers that are suitable to your credit profile.
How to Improve Your Credit Before Borrowing
If you will find the flexibility to operate in your credit before you apply for a loan, doing this could help you get approval for better offers. Taking the steps below may help construct your score.
- Make all debt payments on time. Payment history is an essential aspect of your credit score. Paying on time over time will help you improve your credit.
- Reduce your card balances. Credit utilization—a ratio that expresses how much of your available credit lines you're using—is another main factor that affects your score. Adding even a small extra payment toward your cards every month could help you chip away at balances to assist improve your credit rating.
- Take care of past-due payments. Although late payments can remain on your record for up to seven years, paying off past-due balances might be better for your credit rating than letting an unpaid balance linger.
- Make sure no inaccuracies are hurting your score. Review your credit history regularly to make sure there aren't any incorrect records negatively affecting you. Should there be info on your credit score you believe to become incorrect, dispute it with the credit agency reporting the data.
Lastly, consider signing up for credit monitoring to keep an eye on your score and progress. With Experian CreditWorks℠, you can track your score as well as use score simulators to review how making different moves might help or hurt your credit.