Four Safer Alternatives to Payday Loans and Early Wage Apps

If you're struggling to pay your bills, there's some cold comfort in knowing you're not alone. The federal minimum wage remains at $7.25 an hour, a number set in 2009. The highest local minimum wage in the country can be found in the District of Columbia, which mandates $17 per hour. That sounds great until you consider that a living wage in 2022 was considered to be $25 per hour for a family of four with two working adults, and the average hourly wage for workers in the U.S. is just $11.21.

So it's no wonder that so many people find themselves scrambling for cash-and considering payday loans. Payday loans have some superficial advantages for busy, exhausted people: They're convenient, they're fast, and they offer small loan amounts that seem manageable in the short term. The problem is that they're also predatory: Some payday loans have annual percentage rates (APRs) as high as 652%, with many offered by Native American tribes that don't have to adhere to federal law concerning their loan terms. Even borrowing a small amount from a payday loan can quickly snowball into an untenable debt that drives you to borrow more just to stay afloat.

If you need quick cash and you're considering a payday loan, don't. Look into one of these safer alternatives instead.

Payday alternative loans

If you find yourself in need of short-term loans, it might be time to join a credit union. These organizations are member-owned and operated on a not-for-profit basis, and credit unions that are part of the National Credit Union Administration (NCUA) offer a great option called a Payday Alternative Loan (PAL). There are two kinds of PALs (PAL I and PAL II); the latter is your best bet if you're not already a member of a credit union, because you're eligible for it as soon as you join (for a PAL I loan, you need to be a member for at least a month).

PAL loans fund between $200 and $2,000 and charge a maximum application fee of $20 (some credit unions may not charge a fee at all), with terms between one month and a year. The APR will vary depending on your credit, but won't be higher than 28%. A 28% APR isn't terrific, of course-but it's a lot better than a 652%. Members can take out three PAL I loans in a six-month period, but can take out as many PAL II loans as necessary-assuming you qualify.

Bank loan

If you can't find a credit union in your area, check if local banks offer either Bad Credit Loans or Small Dollar Loans:

• Bad Credit Loans are just what they sound like: loans designed for people with terrible credit. The APRs on these loans will be high (as high as 35.99%) but not nearly as astronomical as a payday loan, and they will fund as little as $300 in some cases. Keep in mind that there may be other fees involved with these loans, and there are predatory lenders offering similar personal loans. Only consider this option from an established, reputable bank.

• Small Dollar Loans are regular bank loans, but they're made in much smaller amounts than typical personal loans. For example, Wells Fargo offers existing customers a Flex Loan up to $500 for a flat fee, paid back over four months, and U.S. Bank allows its customers to borrow $100-$1000 for a flat fee of $6 per $100 borrowed, paid back over three months. It might be worth it to check if your bank offers a small dollar loan, as it's a much cheaper option than a payday loan.

Peer-to-peer loans

Peer-to-peer (P2P) loans are funded by investors, and are typically easier to get than bank loans, although they often charge an origination fee just like a bank. Lending Club is a popular P2P lender that offers loans as small as $1,000 at rates that top out at 35.99%.

Lending circles are another form of P2P loan to consider, although they can take longer to get and thus might not be suited for emergencies. A lending circle is a private group that contributes money to a fund and then offers either zero-interest loans or regular payouts to its members. There is a regular cost to membership, and you have to already be a member to get access to loans from a lending circle, but it can be a good alternative if you have a regular need for small loans.

Salary advance

Finally, you could consider asking your employer for a small advance against your wages. However, you should avoid wage access apps like DailyPay or EarnIn (which some employers already offer as a benefit"). These kinds of loans have some of the same drawbacks as payday loans-they can trap you in a bad cycle of always being a little short on your bills and constantly borrowing more, and they charge fees and can lead to overdrafts on your accounts. If your employer offers advances with no fee (or a nominal fee), it might work for a one-time emergency need as long as you make a plan for the smaller paycheck coming your way so you don't have to borrow again.