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5 Alternatives to an Expensive Cash Advance
When an unexpected bill rears its ugly head, you might find yourself considering one or more high-interest "cash advance loans" in order to make ends meet. These short-term payday loans might seem like the only option you have available to you—especially if you’ve got bad credit—but they most likely are not. (For all the details around cash advances, visit the OppU post What is a Cash Advance?)
Instead of simply settling for an expensive "cash advance loan," make sure you explore every possible way to cover that surprise expense. These five alternatives are a good place to start.
1. Friends and family.
Easier said than done, right? And it’s true! Borrowing money from friends and family has a lot of advantages over taking out an expensive cash advance loan, but it certainly has its downsides as well.
The positives: It’s a fair bet that you’ll pay a much lower interest rate on this loan than you would on cash advance loans, which come with average APRs of 400%! You might even be able to borrow that money interest-free! Although that isn’t something you should count on.
The downsides, on the other hand, are pretty obvious. Failing to pay back this money might not end up hurting your credit score, but it could irreparably damage your relationship with a person you’re close to.
Unlike with a traditional loan, friends and family members are more likely to be flexible with your payment dates. This is a positive that can easily become a negative. If you are constantly blowing past pre-agreed upon due dates (or the two of you never set a date, to begin with), that could be the end for that relationship.
If you are able to borrow money from a friend or family member instead of taking out a cash advance loan, we recommend that you and the other party set crystal clear terms before any cash changes hands.
2. Credit cards.
One of the reasons that people turn to cash advance loans is because they don’t have a credit card or they have maxed out the ones they already have. Folks in these situations often have the kinds of low credit scores that prevent them from taking out a new card.
All that having been said, if you do have the option of putting an emergency expense on a credit card instead of a cash advance loan, it will mean lower interest rates and more manageable payments. It’s not a good option, but it’s a better bad option.
With a payday cash advance loan, you’ll have to pay the entire thing off at one—interest and principal. And while the promise of getting out of debt quickly sounds good, the reality of the situation is different. According to a study from the Pew Charitable Trusts, well over 80% of payday loan borrowers don’t have the money in their monthly budgets to afford their loans.
This means that many borrowers are left to either take out a new loan immediately after they pay off the old one or “roll over” the original loan—extending the due date in return for a brand new interest charge.
Credit cards can also leave you stuck in a debt cycle—let’s make that clear—but they do let you pay off a larger bill more gradually, and with a much lower interest rate. You should still pay off the charge as aggressively as you can, but you’ll be given far more breathing room to do so.
Racking up massive amounts of credit card debt can be a huge problem. But when compared to cash advance loans, credit cards are a far more affordable option.
3. Installment loans.
Not all bad credit loans are of the short-term variety. Some come with longer repayment terms and an amortizing payment structure where you pay the loan off in a series of regularly scheduled payments—just like regular personal loans!
These are installment loans, and they may be worth a look. While it’s tough to make broad statements across the many different lenders, borrowers, and local regulations governing these types of loans, the right bad credit installment loan could be a much better option for you than a short-term cash advance.
The right bad credit loan will have lower rates than a payday cash advance or title loan, and it will also come with more manageably sized payments that fit your budget. The lender may even report your payment information to the credit bureaus, which means that making your payments on time could help raise your score!
If you’re considering a bad credit installment loan, take a look at whether or not the lender checks your ability to repay. While these loans are generally considered “no credit check loans”—because the lenders don’t run a hard credit check when you apply—some lenders still do their due diligence.
4. Pawn shops.
In case you’re not familiar with them, here’s how pawn shops work. You bring in a valuable piece of property and you use it as collateral to secure a small-dollar loan. You then have a set amount of time to pay the loan back, which varies from state to state, and oftentimes you’ll have an option to extend). If you don’t pay the loan back (plus interest) the pawn shop is able to sell your collateral. That’s it!
Obviously, there are downsides to this: namely, the loss of your valuables! Plus, you’ll be hard-pressed to receive a loan that’s actually worth the item’s full value.
5. An emergency fund.
For folks who already need to cover an unexpected expense, this option won’t do you much good. The point of an emergency fund is to already have it in place before you need that extra cash. This way, you don’t have to worry about borrowing any money at all!
But for everyone else, building and maintaining a well-stocked emergency fund is the best alternative to an expensive cash advance. The earlier you start building one, the better.
Experts generally recommend an emergency fund large enough to cover six-months living expenses. That’s a lot of money! But instead of letting yourself get overwhelmed, just start saving whatever money you can—even if it’s as little as a few dollars a week.