Need emergency cash? Payday loans aren’t your only alternative.

At a time when gig jobs or small paychecks keep many Americans on financial edge, credit unions and small banks are among those offering small loans that don’t come with sky-high fees.

Barbara Martinez was driving home on Interstate 55 when another car merged too soon, swiping her 2011 Honda Civic and putting her in a financial bind. Her insurance would pay for repairs – the other driver was uninsured – but her deductible was high and she lacked savings to pay it.

Millions of Americans find themselves in the same predicament, short of cash with bills to pay. Often they borrow from friends and relatives. But many also turn to payday loans that are easy to get but hard to pay back.

Ms. Martinez, who is 40, had taken a payday loan before: $350, to be repaid in two weeks, plus fees. “I remember thinking ... it’s going to take so much money to pay this back,’” she says.

This time she had an alternative. A local credit union lent her $1,000 at low interest, with six months to repay. A part of her payments went into a savings account. It kept her car on the road and allowed her the “peace of mind,” she says, that a payday loan could not.

Payday lending has come under increasing scrutiny because of its heavy cost to borrowers, including high fees, short repayment periods, and the danger of ensnaring them in debt. Eighteen states now restrict or ban the loans. In October the federal Consumer Finance Protection Bureau imposed new rules aimed at curbing their worse features.

At the same time, efforts are growing to provide alternatives, like the “borrow-and-save” loan Martinez used to fix her car. It’s one of the ways that credit unions, small banks, advocates for low-income families, and an increasing number of employers are working in communities around the country to meet the needs of financially vulnerable families. Most of these alternatives are small in scale, especially compared with the payday loan industry’s estimated 12 million customers a year. But advocates believe that the mounting restrictions on payday lending offer an opportunity to make alternatives more widely available.

“Getting rid of bad loans could help good loans to flourish,” says Lauren Saunders, associate director of the nonprofit National Consumer Law Center.

No one argues that alternatives to payday loans can, just by themselves, relieve the financial strain on families struggling to make ends meet. When Walmart, the country’s largest employer, announced in December that it would allow its employees to take advances on their paychecks, the response from critics was: Why not just pay them more?

“For someone who doesn’t have enough money for expenses, credit isn’t the answer,” Ms. Saunders says.

Families with unexpected needs, volatile incomes

But even critics of payday lending say that access to short-term credit is crucial to low- and middle-income families, many of whom live paycheck-to-paycheck and are ill-prepared to handle unexpected expenses. The popularity of payday lending, they suggest, is symptomatic of an economy that relies heavily on low-wage workers, and in which more than half of all households report spending more than they earn. Studies have found that, amid trends like “gig” work and variable scheduling, incomes often fluctuate from week to week.

“That’s a massive problem,” says Nick Bourke, an expert on consumer finance at the Pew Charitable Trusts, which has studied payday lending. “It explains why people turn to payday loans.”

Martinez was able to repay her payday loan on time, but most borrowers can’t. They renew the loan over and over, as fees mount and push them further into debt. On an annual basis, interest rates can exceed 300 percent.

Among the leaders in payday alternatives are credit unions, member-based institutions with a history of serving low-income communities. North Side Community Federal Credit Union in Chicago introduced small-dollar loans 20 years ago, when payday loans were just becoming popular. Two years ago, it began offering larger loans with a borrow-and-save requirement, an increasingly popular feature of payday alternatives. Borrowers are offered financial counseling, an effort to nudge them further along the road to long-term financial stability.

“It’s a complex problem,” says Sarah Marshall, North Side’s CEO. “Offering a payday alternative loan is just one factor in getting people away from payday loans.”

Martinez has taken out three of the loans –  once for her car, once to pay medical bills and once to fix a tooth.  She’s not poor: She works full-time at a nonprofit agency, promoting “asset building” among low-income clients. But even a regular salary can’t make her feel secure.

“It’s stressful, even when you have a full-time job,” she says. “You don’t know what will happen next year.”

A new market for small banks?

The federal government has taken steps to encourage payday alternatives. In 2010 it introduced new rules that allow credit unions to charge higher interest on small personal loans. The number of credit unions offering the loans has since risen to more than 500 – about a tenth of the credit unions in the country.

Some smaller commercial banks also offer payday alternatives. Mitchell Bank in Milwaukee was among 28 banks that participated in a pilot program several years ago supported by the Federal Deposit Insurance Corp. Mitchell charged borrowers from 15 to 22 percent interest and required them to put 10 percent into savings.

“It was absolutely a success,” says Mitchell’s CEO, Thomas Hart. The bank continues to offer the loans.  One of the main attractions of payday loans is their convenience, and so Mitchell has tried to make its alternative easy for borrowers, too.

“They come in and we cut them a check right away,” Mr. Hart says. “People have definitely used it rather than payday loans.”

In St. Louis, RedDough Money Centers offer loans in storefront operations that compete directly with the payday lenders that are ubiquitous in many low-income neighborhoods. The nonprofit offers small loans at 36 percent interest –  higher than many other alternatives but considerably lower than payday loans. The repayment period ranges from four to 12 months.

“The challenge for us is scale,” says Paul Woodruff, CEO of the St. Louis nonprofit Prosperity Connection, which runs RedDough. “We’re working hard to get the word out.”

Employers offer loans and advances

Perhaps the fastest-growing alternatives are salary advances and small loans offered as a workplace benefit.  The 2008 recession seems to have marked a turning point, says Meredith Covington, who directs the study of financial wellness programs at Washington University in St. Louis.

“Employers started recognizing that a lot of their employees were undergoing major financial hardship after the recession,” Ms. Covington says.   

Lutheran Social Service of Minnesota is one of them. Based in St. Paul, the agency employs 2,300 people, most of whom work part time for $11 to $13 an hour. Joyce Norals, head of human resources, says she was skeptical about a small-loan benefit until she saw how popular it was.

“It aligns with our values as an organization, helping people sustain their lives,” says Ms. Norals. “It’s a far better alternative.”

Employers don’t lend money themselves but use third-party vendors to connect employees with banks. Advocates say the approach works because it’s efficient. Lenders have access to payroll information and can withdraw payments directly from a worker’s paycheck.

Employees of Lutheran Social Service get their loans from Sunrise Banks, which provides small-loan benefits to more than 100,000 employees at 2,500 firms across the country.

“Making small-dollar loans to people with no credit scores is hard to do,” says David Reiling, Sunrise’s CEO. “It’s much easier to eliminate risky borrowers from your portfolio or to increase fees on those borrowers to offset risk.”

For this and other reasons, the reach of payday alternatives remains limited. Alternatives come mainly from small institutions already dedicated to serving low-income communities.  Many people don’t know about them.  “They’re still working out the details of what works,” says Margaret Sherraden, a professor of social work at the University of Missouri-St. Louis who is writing a textbook on financial services for low-income households.  

“We see a space where there needs to be a little more creativity,” says Prosperity Connection’s Mr. Woodruff.

Martinez sees a lot of need around her: Single mothers, one-income households, Uber drivers and those juggling multiple part-time jobs.  When squeezed, a lot of them use payday loans, pawnshops, or online lenders. She suggests they look at the alternative that helped her.

“I feel it’s a hidden treasure,” she says.