If you’re in need of quick money, one option you may have been considering is a payday loan. You’ve probably seen the ads on TV or spotted a few payday loan stores in your area. These are a popular option for their convenience, as you can typically obtain them the same day that you apply and the requirements for getting a payday loan are low.
The problem with payday loans is the interest rates, which are very high and often result in a cycle of debt, where borrowers can’t pay off their loans in time and keep accumulating more interest. Before you go for that payday loan, consider a few alternative options.
Bank and Credit Union Personal Loans
When it comes to personal loans, you’re likely going to get the lowest interest rates through banks and credit unions. However, these financial institutions also tend to have the strictest borrowing requirements. You’ll need to provide financial records, income verification, and submit to a hard credit inquiry.
If you don’t have a high credit score, there’s a strong chance that the bank or credit union will deny your loan application.
Of the two, credit unions are usually more flexible regarding their personal loan requirements. You’ll also have better luck at either if you’re already a member.
Personal loans through banks and credit unions are typically much longer than payday loans, with loan terms that can be 1 year or longer. You could always pay off your loan early, though.
This option is the best choice if you have a high enough credit score, as you’ll pay the lowest amount of interest.
With peer-to-peer lending, you’re applying for a loan through an online lender, but that lender is putting your loan application on its marketplace. Investors can then decide if they want to fund your loan. You’ll pay an origination fee to the online lender and interest to the investors.
Online lenders do have minimum requirements you must meet for a peer loan application, but they tend to be much lower than bank or credit union requirements. The interest rates are moderate – higher than bank or credit union interest rates, but still much lower than payday loan interest rates. These loans usually have similar term lengths to bank and credit union personal loans.
This loan option is the most similar to payday loans, with a few key differences. While payday loans are unsecured because they don’t have any form of collateral attached to them, title loans use your car as collateral. You give the lender your car title when you obtain your loan, and then get it back when you’ve repaid the loan.
Loan terms are usually 30 days, although this does depend on the lender and your state. Interest rates are high, although not as high as they’d be with a payday loan. Like payday loans, you can obtain a title loan the same day that you apply for it.
Title loan interest rates vary heavily from state to state. Certain states have regulations on interest rates that make title loans a solid option. Others don’t regulate interest rates, so you end up paying quite a bit.
Choosing the Right Loan Option
The two most important factors in choosing a type of loan are your financial history and how quickly you need the money.
If you can wait a few days or more to get the money and you have a solid financial track record, then you should go with a bank, credit union or a peer-to-peer lending site.
If you need money quickly or you don’t have a good financial history, then you’ll need to apply for a title loan or a payday loan. The former will likely have a better interest rate, as long as you’re willing to use your car as collateral.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.