There are alternatives to payday loans for people struggling with debt. Payday loans are a convenient source of fast cash when your bank account is empty and you have critical bills to pay. They can help you cover the shortfall until your next paycheque arrives and you don’t need to pass a credit check to qualify for one. However, payday loans also come with many downsides, the most notorious of which are the sky-high interest rates (the payday loan industry refers to this rate as a “fee”). For example, in Ontario, the maximum payday lenders can charge is $15 for every $100 they lend. It doesn’t seem like much, but this limit translates to an interest rate of over 390% annually!
In addition, payday loan companies can charge you additional fees and penalties on amounts if you fail to repay what you owe on time. Given the short repayment terms, it’s easy to fall behind on payments, leading you to take out multiple loans from different companies at once. You can quickly get trapped in a payday loan debt cycle, damaging your credit score and straining your budget.
Luckily, you don’t have to turn to payday loans each time you need some emergency cash. In this guide, we’ll show you some alternatives that can save you money and help you avoid these tempting but dangerous short-term loans.
What are some ways to obtain money without resorting to payday loans?
Below is a breakdown of payday loan alternatives, including how they work and their benefits and drawbacks.
1. Get overdraft protection
Best for: Emergency situations where you need an immediate cash infusion and don’t expect to remain overdrawn for long.
Overdraft protection is a service offered by your bank that allows you to spend more money than you have in your chequing account. As an example, let’s say that you have no funds in your bank account, and you purchase an item using your debit card for $300. In this scenario, your bank will cover the shortfall by loaning you $300, allowing you to complete the transaction. Once you deposit money into your account, your bank automatically applies it against your overdrawn balance.
Most banks offer overdraft protection between $250 and $5,000. Since an overdraft is a loan, you’ll be charged interest when overdrawing your account, usually between 19% and 22%. Each time you use overdraft protection, you’ll also pay a fee, typically $5. Despite the double-digit interest rates and fees, the cost is dramatically less than a payday loan.
Pros:
- No need to complete a loan application each time you need access to funds
- Your transactions will process smoothly; you’ll avoid non-sufficient (NSF) fees from bounced cheques
- Annual and monthly overdraft plans are pretty cheap
Cons:
- You’ll have to pay a high interest rate
- You risk overspending due to easy access to extra money
- You must have a good credit score to qualify
2. Negotiate payment options with creditors
Best for: Situations where you have a positive history with creditors and vendors, including a stellar payment history and good credit standing.
Ask your creditors if they can extend your payment due dates. Lenders would rather get paid than have to write off your account, so they may be willing to agree to a revised payment plan or at least give you extra time to catch up. Just remember to be courteous, reasonable, and diplomatic in your negotiations.
The same concept applies to vendors like telecommunications providers and your landlord. Just be honest and forthright about your circumstances. When it comes to landlords, most would prefer to extend your rent due date than evict you, as evictions are costly and tedious.
You’re more likely to get a payment deferral if you’ve been a customer with your creditors and vendors for a long time and have a history of on-time payments. The same goes for landlords – the better your relationship with them, the more likely you can persuade them to grant you an extension.
Pros:
- You avoid taking on more debt, which means there’s no need to worry about paying interest, fees
- Creditors may be willing to waive late fees and avoid reporting late payments to credit bureaus, which means your credit score will remain intact
Cons:
- Creditors may be unwilling to negotiate a payment extension with you
- You risk damaging your professional relationship with vendors and creditors, especially if you fail to deliver on your promise to pay what you owe on time
3. Apply for a personal loan
Best for: Situations where you need to borrow a sizable amount of money with a long repayment schedule and have a good credit score and steady income.
With a personal loan, you borrow a lump sum of money and agree to repay it over a specific period in fixed payments. Many financial institutions offer personal loans, the most common of which are banks and credit unions (the latter usually offers better deals on interest rates).
Payday loan lenders, title loan companies, and private lenders are also sources for personal loans. However, they charge high interest rates compared to traditional banks and credit unions. Personal loans are sometimes called installment loans and consumer loans.
Most personal loan terms range from six to 60 months. Interest rates can be fixed or variable and vary widely based on your credit, income, and other factors. They can be in the low single digits or as high as 47%. Therefore, you should do extensive research to ensure you can get a loan that you can afford to repay.
Pros:
- Terms can be several years long, giving you plenty of time to pay off your balance
- Access to more borrowing capacity (you can only borrow up to $1,500 through a single payday loan)
- You can consolidate multiple debts under one loan at an affordable interest rate
- No prepayment penalties usually
Cons:
- You need a high credit score and reliable income to qualify for a competitive rate
- You must repay the debt through fixed payments with little room to tailor your payment schedule
- You’ll face higher interest rates if you have bad credit
4. Use a credit card
Best for: Instances where you need extra funds to cover a short-term emergency, require a flexible payment plan, and have sufficient credit room.
With a credit card, you can borrow money as you need up to your credit limit and repay over time. You can pay off your balance in full immediately or customize your payment schedule according to your cash flow and budget. To keep your account in good standing, you need to make only the minimum payment each month. However, we strongly discourage this practice, as it can lead to severe debt problems.
If your account is current and you’ve maxed out your card, your lender may approve a credit limit increase – it’s worth asking for one.
Credit card interest rates are typically around 20%. However, there are low-interest cards available, too, and some offer promotional periods where you can even pay zero percent interest for a brief period. Take advantage of these deals to minimize your interest expense if you meet the qualification requirements.
Pros:
- Interest rates are cheaper than payday loans (if you repay your balance within the grace period, you won’t pay any interest)
- You have plenty of flexibility when it comes to repaying your balance
- You can charge bills to your card immediately – no prior approval is required.
Cons:
- Your credit card issuer may not approve you for a credit limit increase if you’re maxed out
- You may fail to qualify for a low-interest credit card if you have poor credit
5. Draw funds from a line of credit
Best for: Situations where you need easy access to a generous amount of extra funds to cover occasional cash shortfalls at reasonable interest rates (provided you have a decent credit score).
A line of credit allows you to borrow money up to a limit determined by your lender. Like a credit card, you pay interest only on the amount you borrow. However, the interest rate is variable, meaning it fluctuates based on changes in your lender’s prime rate.
As a revolving credit product, a line of credit has a clear advantage over a payday loan because of its flexibility: you can pay off your principal in full or with partial payments over a long period (though you must make minimum monthly payments to cover interest charges).
You can obtain a line of credit through your bank or credit union. Alternative lenders, including those online, offer them as well, but at steeper interest rates.
Pros:
- Interest rates are affordable compared to payday loans and cheaper than many credit cards
- You get access to more borrowing power than most credit products
- Flexible payment options and the ability to reborrow the principal when repaid
Cons:
- You can develop a habit of deferring payment of the principal, resulting in a rapid buildup of interest charges
- You’ll need a good credit score to qualify for a low interest rate
- You can get tempted to borrow money for non-essentials, which will increase your debt load
6. Dip into your emergency fund
Best for: If you’re short on cash but can’t access loans at favourable interest rates or are adamant about minimizing debt as much as possible. And, of course, you must have spare cash lying around in the first place!
Do you have a stash of money hidden away in a savings account (or maybe a sock drawer in your home)? If so, now would be the time to use it instead of rushing to a payday loan office.
By tapping into your emergency fund, you can cover unexpected expenses, past-due bills, and more immediately. An emergency fund is easily one of the best lines of defence against a short-term cash shortfall. If you don’t have one, we recommend starting one as soon as you can.
Pros:
- Since it’s your money, you don’t pay a cent in interest and won’t harm your credit score.
- Easy and quick solution to cover short-term cash flow problems – no paperwork or pleading with banks to lend you money
Cons:
- If you’re living paycheque to paycheque, you may not have the luxury of having emergency savings to access
- If you drain your emergency fund for a significant expense, it may take you a long time to rebuild it
7. Try a cash advance from your credit card
Best for: Situations where you don’t qualify for financing due to bad credit and need access to cash fast from your existing credit card.
A credit card cash advance is when you withdraw cash from your credit card account through an ATM. Essentially, it’s a loan, as you’re borrowing against your card’s line of credit.
Financially speaking, it’s an option that you should usually avoid as you’ll be paying a higher interest rate than one on a credit card purchase transaction. Still, a cash advance is a cheaper option than getting a payday loan. Just remember to use it only when necessary and repay what you borrow promptly.
Pros:
- Fast and convenient way to get access to cash – no need to get special permission from your credit card issuer
- It’s an affordable option if you have a low credit score compared to many other types of loans
Cons:
- Higher APRs than a regular credit card interest rate (usually 22% or more)
- There’s no grace period, which means interest collects on your account from the day you withdraw the funds
- You have to pay a fee each time you draw cash from your credit card
8. Ask your employer for an advance
Best for: If you work a steady job and wish to avoid going further into debt, or your financial situation precludes you from qualifying for a loan.
If you get paid a monthly salary, ask your employer if they’d be willing to give you an advance. Make sure to offer a reasonable repayment plan; ideally, you want to settle your balance by your next paycheque. Your chances of getting one are higher if your company is earning healthy profit margins – and if you don’t routinely ask for accommodations and favours.
Pros:
- No credit check is necessary
- Quick access to money in an emergency
- If you’re a trusted and reliable employee, you have a good chance of getting approved
Cons:
- It can turn into a habit where you constantly borrow against your future earnings, leading to reduced future paycheques
- You may have to pay your employer a fee
- Not a feasible option if you’re a gig worker or recently started a new job
9. Sell unwanted personal belongings
Best for: Instances where you’re having trouble getting approved for a loan due to a low income or poor credit history.
Consider decluttering your home of unwanted items. While most will belong in the trash bin, you may have certain things you could sell and make a quick buck.
One way to earn money by selling personal belongings is by holding a garage sale. However, this requires a fair bit of work, and you’ll need a permit from your municipality to set up your impromptu store.
A better solution is to post your items online and have buyers pick them up and pay for them at the location of your choice. Some websites to consider putting your stuff up for sale are Kijiji, Facebook, eBay, and Amazon.
Pros:
- You’re not borrowing money, which means no interest or fees to pay
- You can save any unused proceeds for future financial emergencies
Cons:
- You may not have enough items to sell, especially if you need to earn a considerable amount to catch up with bills and debt payments
- Selling unwanted items can take a long time, which isn’t good if you’re in urgent need of money.
10. Sign up for a cash advance app
Best for: Situations where no you need a small amount of emergency cash for a short period and earn an income.
Cash advance apps have grown in popularity in Canada recently as an alternative to payday loans. As long as you earn some form of income (in some cases, government assistance qualifies), you can download the app and submit a loan application. Once the app of your choice verifies your income, all you need to do is connect your bank account to receive the funds.
These apps offer small advances, usually between $25 and $500. Some charge no interest, instead levying a monthly membership fee, typically under $10. Some examples of cash advance apps are Bree and Nymble.
Pros:
- Interest rates are low or nonexistent
- You don’t have to wait long to get approved and receive money
- You’ll pay little or late fees or penalties
- There’s no credit check requirement in most cases
Cons:
- You can borrow only a small sum of money
- You must repay money borrowed by your next paycheque
- You need to pay a fee if you want to transfer funds instantly
- Some apps charge a subscription fee
11. Ask family or friends to lend you money
While you might be too self-conscious to consider this solution, it’s still worth exploring. Asking a family member or friend for can be a cost-effective way to borrow money. It’s also a payday loan alternative that doesn’t require a credit check.
Just be sure to pay the money back on time without fail. To solidify the agreement, we advise writing a loan contract like you would with any other lender, especially if it involves a substantial amount of money.
Pros:
- You likely won’t face high interest rates and may pay no interest at all
- No credit check or onerous paperwork required to borrow the funds
- Your payment terms may be flexible, more so than if you borrowed from a bank
Cons:
- If you fail to repay the loan, you risk harming your relationship with your family member or friend
- If you need to borrow a large amount of money, finding someone close to you who can provide what you need can be challenging
12. Explore peer-to-peer lending
Best for: If you need to borrow a large amount of money but don’t qualify for a loan from a traditional financial institution.
Peer-to-peer lending (P2P) occurs on online platforms that bring together borrowers and creditors. It’s a faster way to obtain financing than going through a bank or credit union. Plus, you have a better chance of getting approved with a poor credit score.
P2P platforms offer various types of financing, including personal loans, business loans, debt consolidation loans, and auto loans. Depending on your credit standing, you could borrow several thousand dollars or more.
To gain access to lenders, you must apply online, after which the platform will evaluate your credit report and assign you a risk profile. You’ll then receive a range of loan options and can pick the one that you find most suitable.
An example of a P2P website in Canada is GoPeer. Even Reddit has its own P2P group through the subreddit r/borrow.
Pros:
- Fast application process
- Access to a wide range of borrowing options, even with bad credit
- You may secure a lower rate than what banks and traditional lenders offer
Cons:
- Given the rapid growth of the P2P industry, there’s a lack of regulations to protect borrowers
- The P2P website may charge high administrative fees, and lenders may charge excessive origination fees.
- It may take you a while to receive money after getting approved for a loan
13. Join a lending circle
Best for: Situations where you can donate funds regularly and are not in urgent need of cash but wish to refrain from taking on traditional loans.
A lending circle is an informal group of people who lend money to each other from a pool of funds to which they contribute.
It works as follows: each member of the lending circle contributes a fixed amount of money to a shared pool. Then, the group allows one person to collect the entire amount to use as they wish. Next month, the members replenish the pool, again contributing the same fixed amount. This time, the next person in line gets the privilege of using the entire amount. The process continues until every member of the lending circle has had the chance to access the pooled funds.
Pros:
- Money borrowed through a lending circle comes with a low-interest rate or is interest-free
- Some lending circles report members’ payments to credit bureaus, which can help you increase your credit score.
Cons:
- Being part of a lending circle requires a long-term commitment and regularly contributing money
- You may have to wait months before it’s your turn to collect the money from the shared pool
How working with a Licensed Insolvency Trustee can help you avoid payday loans for good
When you need cash fast, you have many alternatives at your disposal. But while these can spare you from financial trouble in the short term, they can still lead to debt problems if you use them routinely.
Therefore, always exercise caution and restraint when using the payday loan alternatives described in this. Always remember: they’re short-term solutions and won’t help you resolve any severe debt or cash flow problems you’re experiencing.
If you’ve tried several of the payday loan alternatives in this article, and you still need help to keep up with bills and debts, contact a Licensed Insolvency Trustee at David Sklar & Associates. They can help you implement a range of debt relief plans, whether debt consolidation, budgeting, or a government debt relief program like a consumer proposal, which can lower your unsecured debts by up to 80%.
No matter how dire your situation is, there are always options to escape crushing debts, including payday loans. Start your journey toward financial freedom by booking a free, no-obligation consultation with David Sklar & Associates.
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