4 alternatives to short-term loans


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When an emergency arises, the last thing you want to do is turn to a short-term lender.

Key points

  • Unforeseen financial emergencies are part of the routine of life.
  • Payday lenders, title loan companies, and other predatory lenders regularly charge an APR of 400% or more, making it difficult to repay the loan.
  • Most alternatives to short-term loans will save you money.

One of the scariest things about being an adult is also one of the most exciting: there’s no telling what’s going on around the corner. No matter how bad things get, they have a way of turning it around. And no matter how good things are, small problems are bound to get in the way on occasion. If there is a problem, it can be made easier if there is money in your bank account. However, this is not always the case.

For example, suppose you are driving to work one morning and your car breaks down on the highway. Your credit cards are exhausted, you don’t have roadside service, and you don’t feel like you have any other options but a short-term or payday loan. Rather than settle for a loan from a predatory payday lender, consider these four alternatives:

1. Let your friends and family know what you’re dealing with

It can be hard to let family and friends know what’s going on with your finances, but a loan from someone you care about is the cheapest way to borrow money. Here are some tips to make sure a personal loan from someone you know doesn’t hurt your relationship:

  • Borrow only what you need.
  • Provide the lender with a receipt for what you spent.
  • Create an IOU outlining how much you borrowed, how much you’ll repay each month, and how long you have to pay off the loan in full.
  • Pay the person back no matter what happens in your life. There are few things worse than leaving someone you care about in the lurch.

2. Look for an alternative payday loan (PAL)

If you are a member of a credit union, check to see if your credit union is a member of the National Credit Union Administration. If so, you can apply for a PAL. The idea behind a PAL is to prevent credit union members from having to borrow money from securities lending companies, payday lenders and others who may charge a 400% APR or more.

You can use a PAL to cover an emergency expense (like a broken down car on the side of the road) or to pay off a payday loan if you get stuck. PAL loans range from $200 to $1,000 and you have one to six months to repay the loan in full. Your credit union may charge you an application fee of up to $20.

PAL loans have interest rates comparable to credit cards, but will definitely be lower than a payday lender’s rates.

3. Apply for a loan or credit card with a co-signer

When you apply for a personal loan or credit card with a co-signer, the lender considers each of your credit histories. If the person co-signing for you has great credit, it makes the process easier. This is because the lender knows that if you don’t make payments on the account, they can sue the co-signer for the money.

Getting someone to co-sign for you is a big deal, so make sure you pay off the loan as soon as possible. Never miss a payment and never give the creditor a reason to contact your co-signer.

4. Apply for a secured personal loan

A secured personal loan works like this: you put something of value as collateral. This can range from a refurbished car to valuable coins. Basically, it has to be something that can be formally appraised because the lender will require an appraisal.

Even if your credit score has taken a hit, a lender is more likely to approve your loan because they know it’s protected. If you don’t make the payments as promised, the creditor has the right to take possession of the collateral, sell it and recover its loss.

You will likely find that the interest rate on a secured personal loan is lower than the average credit card APR.

One of the benefits of experiencing financial difficulties is knowing how much one can learn from the experience. Once you have repaid the borrowed money, you have the option of creating an emergency savings account. Ideally, the next time a small financial emergency arises, you will have the funds to cover it without worrying about where you will find the money.

The Ascent’s Best Personal Loans for 2022

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