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There’s one particularly good reason to stay away from payday loans: they’re painfully expensive. It’s not uncommon to see a 400%+ annual percentage rate (APR) – and that’s following provincial regulations.
Before taking out a payday loan, look into alternatives.
1. Apply for financial assistance
Check whether your local non-profits can help with expenses such as rent and utility bills. You can also check your provincial and municipal websites for government assistance available to you. As an example, the Toronto Rent Bank provides grants to eligible Toronto residents who are behind on their rent.
Whichever province you’re in, you can visit 211.ca to get connected to the support you need.
If you’re a student, reach out to your school’s financial aid office and check whether you’re eligible for any student loans or aid.
Pros
No debt increase. You won’t be taking on more debt, which will help your finances.
Free. Assistance from non-profits is usually free or low cost.
Cons
Strict requirements. Your personal situation may not be eligible for financial assistance.
Takes effort. Finding a non-profit that can help takes time and effort.
2. Consider an installment loan
An installment loan is a type of personal loan offered by online lenders. You can typically get an installment loan quickly and with lower APRs and longer repayment terms than a payday loan. Instead of making 1 lump sum payment, you will make repayments in installments over a set period of time. Lenders may look at your credit score when you apply, but they will more likely be interested in your ability to repay your loan.
An installment loan is a decent payday loan alternative because it’s often offered to the same type of customer as payday loans.
Pros
Loan terms between 3 and 60 months. You can choose a loan term that complements how much you can afford in monthly payments.
Bad credit is considered. There are some lenders that can finance you even with bad credit.
Loan amounts over $1,500. A payday loan maxes out at $1,500. An installment loan is typically between $500 and $10,000.
Cons
High interest rates. APRs typically range from 18% to 47%. Borrowers with poor credit scores will face higher interest rates.
Although you may not be able to get a line of credit from a bank, you may be able to get one from an online lender. With a line of credit, you can borrow up to a limit and pay interest on the amount you borrow. It’s a decent payday loan alternative because of its open term.
Pros
Open term. Pay off your loan partially or in full any time. Since you’re not required to pay back the loan within a very short period of time, your finances have more time to recover.
Potentially cheaper than a payday loan. Mogo, for example, says its MogoMini line of credit is 88% cheaper than a payday loan.
Cons
Expensive. Interest rates can be as high as 47%.
Potentially pay more interest. With an open term, it can be tempting to hold off on repaying your loan. But if you take too much time to pay off your loan, you could end up paying more interest than a payday loan.
Risk of borrowing more. You only need to apply once to borrow up to your limit whenever you want. With easy access to funds, it can be tempting to borrow more than you need.
A credit card has a much lower interest rate than a payday loan. If you’ve already maxed out your credit card, try to see whether you can increase your credit card limit before you get a payday loan. Your credit card provider may be able to approve the increase if you have a solid history of on-time payments.
Pros
Cheaper than a payday loan. Credit card APRs are around 20%.
Rewards. You can earn rewards when you use your credit card.
Cons
May not qualify. Your credit card provider may not approve you for an increase if you don’t have a good credit file.
5. Consolidate your debt
If high-interest debt is holding you back from meeting your other financial obligations, you might benefit from consolidating that debt. This means borrowing a larger sum of money to pay off multiple debts, then focusing on paying off that 1 loan. Consolidating your debt reduces the confusion of having multiple payments and may even offer a lower monthly payment while you eliminate your debt. You could save on interest and pay off your debt faster.
Pros
Easier to manage. If you combine your debts into 1 loan, then you only need to make 1 payment each month.
Potentially lower interest rate. Depending on your finances, you may get a lower interest rate than what you currently have.
Cons
May not qualify for a lower rate. If your finances are in bad shape, you may not qualify for a lower interest rate.
A credit card cash advance is cash borrowed from the credit limit of your card. Cash advances aren’t always the best option because of their high APRs, but if you’re in urgent need of funds, the fees and terms may be better than those of a payday loan. It’s often better to take the high interest rate of a cash advance that you can pay off over a longer term.
Pros
Speed and convenience. You can get a credit card cash advance by withdrawing from an ATM.
Cons
Interest accrues immediately. There is no grace period with a credit card cash advance. The moment you withdraw the cash, interest will be charged on the amount.
Expensive. Even though they have lower APRs than payday loan, they are still an expensive option.
Additional fees. You may be charged fees in addition to the interest.
At the end of the day, your creditors want to get paid, and they may be willing to work with you to ensure that they do. Contact them and tell them you’re having trouble keeping up with your debt. They may help you create a repayment plan or extend your due date to ease your financial burden. You’d be surprised how many lenders are willing to help you work through your tough financial situation.
Pros
No additional debt. You’re not taking on more debt that could make your financial situation worse.
Cons
Creditors may not be willing to negotiate. Unfortunately, this option is only feasible if you have creditors who are willing to work with you.
8. Seek credit counselling
A credit counsellor can help you create a budget and a debt repayment plan. The main benefit to credit counselling is solving the structural issues that led to your financial problems in the first place, whether it’s your lack of budgeting, your low income or your overspending.
Call Credit Counselling Canada for free financial counselling (Monday-Friday 8:00am-5:00pm at +1 866-398-5999). It may be hard to see the light at the end of the tunnel right now, but we recommend investing a bit of time to organize your finances through counselling. The effort you spend now on this payday loan alterative will pay off over the long run.
Pros
Free or low cost. You can receive valuable advice on how to improve your finances at little to no cost. If there is a cost, Credit Counselling Canada will let you know first.
Cons
No funds provided. Credit Counselling Canada does not loan money.
9. Get a personal loan with a cosigner
A cosigner is a friend or family friend whose finances are in good shape. By cosigning the loan application with you, they act as a guarantor. If you default on your loan repayments, they are on the hook to cover those payments on your behalf. This is a legitimate payday loan alternative if you can responsibly manage your repayments.
Pros
Higher chance of approval. Having a guarantor means lower risk for the lender, so they are more likely to approve you.
Cons
Cosigner responsibilities. Your cosigner needs to meet the lender’s criteria to qualify. Also, if you default on your payments, your cosigner’s finances will also suffer, which can damage your relationship.
It’s not for everyone, and sometimes debt relief companies can do more harm than good. However, if you’re truly facing financial hardship and even considering bankruptcy, then a debt relief company is a legitimate payday loan alternative. A debt relief company can help you come up with a solution to reduce and manage your debt.
Pros
Get out of debt. A debt relief company can help you get out of debt through services like credit counselling, debt management and debt consolidation.
Cons
It’s risky. If a debt relief company advises you to stop paying your creditors, your finances could suffer more.
A secured loan is a loan backed by collateral. There are many types of collateral you can use, such as your home, car or jewelry. A secured loan is a good payday loan alternative, especially if you’re looking for lower rates, but if you default on your loan, the lender can repossess your asset.
Learn more about pawn shop loans (your jewelry and other valuable items as collateral).
12. Ask friends or family for help
It can hurt your pride, but you should consider asking your friends or family to help cover your short-term financial needs. They may be more than happy to lend a hand. This payday loan alternative often has the advantage of no interest, but you should focus on repaying your friends or relatives promptly.
Pros
Flexibility. Since you’re negotiating with a loved one, you can ask for a low or no interest rate and a loan term that works best for your financial situation.
Cons
Can hurt relationships. Finances are a sensitive subject, and if you don’t follow the terms of your loan, you could damage your relationship with your friends or family.
13. Sign up with a early payroll app
Pay advance apps in Canada such as Nyble, Bree and KOHO let you access a percentage of your paycheque, usually up to $200, in advance. You won’t be charged interest, but you may need to pay a small fee or meet other conditions to access the service.
Pros
Free or low cost. Borrow a small amount for free or pay a low fee.
May improve credit score. Nyble reports payments to the credit bureau to help you improve your credit score.
Fast. It’s possible to get funding on the same day.
Cons
Low amounts. You can borrow less than $200, which is lower than a payday loan’s maximum.
Conditions apply. With KOHO for example, your employer will need to provide your payroll information, and you’ll need to sign up for its savings account.
14. Get overdraft protection
An overdraft protection is a service offered by your bank that allows you to withdraw more than what you have in your bank account.
Pros
Transaction will go through. Instead of facing non-sufficient funds (NSF) fees, your cheques will clear.
Available for emergencies. You get quick access to cash when you’re in urgent need of funds.
Cons
Fees. This service comes with fees, either monthly or per overdraft.
Risk of overspending. This is a convenient service, but you run the risk of using overdrafts too much.
Strict requirements. You’ll need good credit to qualify.
15. Get a loan from a credit union
You may be able to take out a small loan with a credit union. Credit unions are known for offering loans at great rates. Furthermore, they’re often more willing to look at additional approval factors besides finances when extending loans, such as how long you’ve held your account with them. If you can qualify, this is a better payday loan alternative than other loans with high interest rates.
Examples of credit unions that offer small loans as a payday loan alternative include Vancity and Servus.
Pros
Competitive rates. Credit unions can offer some of the lowest interest rates for personal loans.
Cons
Membership required. You may be required to have a membership to access their products.
Stricter eligibility criteria. You will need to meet stricter requirements than the other loans mentioned above.
16. Ask your employer for an advance
It can be an uncomfortable conversation, but you can politely ask your boss for an advance. Choose a time when your boss is calm and relaxed and when your company’s revenue is at a high point. Ask for a one-on-one meeting. Offer to repay by your next payday, but if this isn’t possible, come prepared with a repayment schedule. Also, offer to work more hours or pick up extra shifts in exchange for the advance.
Frequently asked questions
You have several payday loan alternatives, which include credit counselling, overdraft protection, cosigned personal loan, installment loan, credit card cash advance and more.
Payday loans are enticing because they can give you access to extra cash very quickly, but the price for this convenience is excruciatingly high interest rates, which can be 400% or more. The interest can add up quickly, especially if you find yourself returning to payday lenders repeatedly. When each future paycheque is going toward paying off your payday loans, you could very easily get stuck in an endless cycle of debt.
Leanne Escobal is a publisher for Finder. She has over 11 years of experience in financial services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University.
Compare cash advances and payday loans to decide which is better for you.
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