A payday loan might seem like the best solution when you need money quickly and don’t have other options. But these loans come with high-interest rates and fees, so they can actually cost you way more money in the long run.

If you need money quickly, there are several alternatives to payday loans that can help without getting you into a debt trap. In this article, we will look at what these loans are, why they can be bad for your financial health, and what alternatives there are when you need cash quickly.

Let’s get started.

What is a payday loan?

A payday loan is a short-term, high-interest loan typically due on your next payday. The idea behind payday loans is that you can borrow money against your next paycheck to help cover unexpected expenses or emergencies.

The problem with these loans is that they often come with very high-interest rates and fees. This means that you could end up paying back way more than you originally borrowed, even if you just make the minimum payments.

Plus, if you can’t repay the loan on time, you may be charged additional fees, and your credit score could be negatively affected.

Where can you get a payday loan?

There are two typical locations where people find payday loans.

Physical stores

Several physical stores offer payday loans, such as check cashing stores and pawn shops. Others are specifically designed to provide quick cash to people with extreme financial needs. If you walk or drive around your neighbourhood, there’s a good chance you will see one or more stores offering this type of product with high fees.

Online

You can also find online payday loans more quickly than you could in the past. Getting an online payday loan is meant to be easy; they will likely come with the same high-interest rate you would find in physical storefronts. Make sure you read the reviews before you apply for a loan.

Why would someone need a payday loan?

There are a few reasons why someone might need to take out a payday loan.

Lack of traditional credit

First, they may not have access to traditional forms of credit, like credit cards or personal loans. This can be because they have bad credit or no credit history at all.

Unexpected Expenses

Second, they may need the money quickly to cover an unexpected expense, like a car repair or medical bill. And third, they may not have enough money to cover their costs.

Poor budgeting

Finally, some people lack the budgeting skills to keep enough cash in their bank account between pay periods. If this happens, it’s often easy to end up at a payday lender looking for quick cash.

What are the risks of taking out a payday loan?

While there may be some situations where a payday loan makes sense, it’s important to understand the risks before borrowing any money.

High interest rates and fees

As we mentioned before, one of the most significant risks of taking out a payday loan is that you could pay way more than you originally borrowed. 

This is because of the high interest rates and fees typically associated with these loans. For example, a two-week payday loan with a $15 per $100 fee would have an annual percentage rate (APR) of almost 400%.

This means that if you borrowed $500, you would need to pay back $675 just two weeks later. And if you can’t repay the loan on time, you may be charged even more in fees.

Credit score implications

Another risk of payday loans is that they can damage your credit score. This is because most payday lenders, in the event of non-payment, will refer your file to collections. And once your file is in collections, it can be seen by the credit bureaus. Keeping your credit score clean is critical to getting better access to credit and favorable loan terms.

Debt trap

Finally, taking out a payday loan can put you into a debt trap. This is because it can be easy to roll over or renew a payday loan, which means you end up paying even more in fees and interest.

If you can’t afford to repay the loan, you may be forced to take out another loan just to cover the costs of the first one. And so on and so on.

Before you take out a payday loan, it’s important to understand all the risks involved. Otherwise, you could end up in a situation where you’re struggling to repay the loan and damaging your financial health in the process.

What are the alternatives to payday loans?

If you’re in need of quick cash and don’t want to take out a payday loan, consider some of these alternatives instead.

Bank loans

Personal loans from banks or credit unions are typically much cheaper than payday loans, with APRs starting as low as 5%. You’ll need good credit to qualify for the best rates, but even if your credit isn’t perfect, you should still be able to get a decent rate on a personal loan.

Credit cards

If you have good credit, you may be able to use a 0% APR credit card to finance your expenses. These cards offer interest-free financing for a set period, usually 12-18 months. Just be sure to pay off the balance before the intro period expires, or you’ll be stuck with a high APR.

Home equity loans

If you own your home and have built-up equity, you may be able to get a home equity loan or line of credit. These loans typically have lower APRs than unsecured loans, but they’re also riskier since you could lose your home if you can’t make the payments.

Friends or family

Borrowing from friends or family is often the cheapest option, as long as you can repay the debt. Just be sure to put everything in writing so there’s no misunderstanding about the terms of the loan.

Alternative lenders

There are several online lenders that will help you get cash in your bank account with a simple credit check. Here at SkyCap, we offer loans to people with no hidden fees and competitive interest rates. The total cost of a SkyCap personal loan will be way less than you will find at payday lenders, and our reasonable qualification requirements make it a no-brainer. Check out our application page to get started.

Conclusion

There are several different alternatives to payday loans, each with its own advantages and disadvantages. Before you take out an online payday loan (or one at a physical store), be sure to research all of your options so you can find the best one for your needs.

Here at SkyCap, we offer personal loans to people with good and bad credit, and our interest rate is always competitive. So if you need quick cash, be sure to check us out.