Some banks, credit unions offer lower cost options to pay day loans

If you need money to pay for an unexpected bill or to make rent, more banks and credit unions have started offering small personal loans with lower costs than payday loans. They may help you avoid getting caught in a cycle of debt you can't pay back. 

Many people started turning to payday loans with interest as high as 600% because banks didn't really offer small personal loans. But now many banks, credit unions, and online lenders do with much lower costs. 

Some credit unions offer small personal loans and pay day alternative loans for a few hundred to a few thousand dollars. Some will lend to people with lower credit scores. Federal credit unions can charge up to 18% interest for personal loans and 28% for pay day alternative loans. 

"Some of them will offer a pay day alternative loan. And these are a little bit rare. But if you can find them, they have low rates, small dollar amounts, and they are repaid over the course of 12 months," explained Ann Millerbernd with NerdWallet. 

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More banks are now offering small personal loans, too, such as Citibank, PNC, US Bank, and Bank of America, with competitive interest rates. You may get a discount for signing up for automatic payments through your checking account.   

"Banks have been welcomed into the small dollar lending space a little bit in the last couple of years by regulators and others. And what you see, with the Bank of America Balance Assist, for example, it’s a small dollar loan and it has reasonable rate," said Millerbernd.

You usually need to be a customer of the bank or credit union for at least a month to get these loans. 

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Several online lenders offer smaller personal loans, such as Upgrade, Upstart, LendingClub, OneMain Financial, Best Egg, Avant, Prosper, and Rocket Loans.  Some cater to borrowers with bad credit scores.  

"They’ll underwrite you based on other information about you, like maybe your cash flow, money going in, money going out," said Millerbernd.  

Before you take out a loan, call 211, the United Way Helpline, to see if you qualify for aid, or borrow money from someone you know.   

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If you do take out a loan, experts advise getting fixed monthly payments of not more than 5% of your monthly income and spreading the payments over three to 12 months. 

NerdWallert has a tool to help you compare different personal loans.