Payday loans are hugely expensive, but around a million households are still lured by the glossy adverts and take one out every month.
Demand for payday loans has soared over the last few years as an increasing number of people have found themselves struggling to make ends meet each month. In some ways the appeal of a payday loan is understandable as you can get access to cash quickly which can seem like a lifeline if you suddenly find you’ve run out of money and are unable to pay a bill or even the weekly supermarket shop.
However, the big problem with payday loans is that rather than proving to be the lifeline people had hoped for, many of those who take them out find it makes their financial situation worse rather than better. The reason for this is the short-term nature of payday loans: they have to be repaid within a month. Yet, the debt charity StepChange reports that 50% of people who take them out can’t afford to pay them off so they incur further charges and find themselves sucked into a spiral of debt which is then incredibly hard to get out of.
But there are other, cheaper alternatives even if you have a bad credit history so before you go down the payday path look at how else you might be able to borrow some money.
Here are some cheaper alternatives to payday loans.
This is the probably the easiest way to dip into emergency cash at the end of the month, as long as you stick to your limit. Most banks and building societies have an authorised overdraft rate of between 16-20% APR, while some charge a flat amount per day. Halifax, for example charges £1 a day.
If your overdraft limit is too low, talk to your bank and ask for it to be extended. This will be a much cheaper option than taking out a payday loan.
Say you needed to borrow £400 for 30 days. With a payday loan you could expect to pay a charge of about £125. This compares to £30 with Halifax or £20 with Santander, which also charges £1 a day but caps it at a maximum of £20 a month.
A bank such as HSBC, which has an authorised overdraft rate of 19.95%, would charge the same borrower about £7 – that is £118 cheaper than a payday loan!
Warning: Avoid going into your unauthorised overdraft
Make sure you know your authorised overdraft limit and always, always stick to it. If you go over your limit into your unauthorised overdraft you will be hit with some hefty charges that will probably end up costing as much, or even more, than a payday loan.
Unauthorised overdraft charges vary amongst banks. Halifax for example levies a daily charge of £5 a day, which could amount to £155 a month. Natwest and RBS charges £6 a day capped at 15 days a month, meaning you could be charged £90 a month.
Even credit cards are a cheaper way to borrow than a payday loan, especially if you need to make purchases but know you can pay it off in a few days after you’ve been paid. In this case you probably won’t pay any interest as most providers give you up to 56 days to clear your balance first. Just remember to never use credit cards to withdraw cash, as you will pay interest from the second you use the cash machine.
If you need longer to repay, and you have a good credit score, you could shop around for a card offering 0% interest on purchases. This means you would pay nothing for a year or more, as long as you repaid the debt before the 0% deal expires.
Even if you have a card with a typical interest rate of 20%, you would only be charged about £7 interest for borrowing £400 for 31 days.
Those with poor credit histories – for example, if you have missed credit payments in the past – could apply for a credit rebuilder card. These typically have higher interest rates of about 40% APR, but even this is cheaper than a payday loan. Borrowing £400 for 31 days would cost you about £12.
This all compares much more favourably to the £125 charge you could expect from a payday lender.
The other advantage of a credit card is that you don’t have to pay your balance off in full at the end of the month. As long as you repay the minimum amount there will be no penalty fees so a credit card can give you some breathing space you won’t get with a payday loan. It‘s worth repaying as much as you can afford each month though because it will reduce the amount of interest you’ll be charged.
Tip: Credit card applications can take up to three weeks to process, so if you’ve been tempted recently by payday loans, apply for a card now so you have it for an emergencies. Then you won’t need to resort to ‘instant’ cash from a payday lender next time you’re in difficulty.
Students and new graduates
Sadly payday loans are often now targeted at students and other young people struggling to make ends meet. However, banks have specific current accounts aimed at both students and new graduates with generous interest-free overdrafts, sometimes as much as £3,000. This means the loan would be free, as long as you paid it back before the 0% overdraft expires.
Halifax offers students an interest-free overdraft of up to £3,000, depending on their credit score. Both Lloyds and Santander offer up to £1,500 in years one, two and three of university, increasing to a maximum of £2,000 in year five.
It’s worth getting organised and switching current accounts if you don’t already have a specific student or graduate account.
You’ve probably not even thought about borrowing money from a credit union but it’s well worth finding out whether there is one in your local area.
Credit unions are small not-for-profit organisations set up to benefit members who have something in common. For example, it could be a credit union set up in a town giving the people who live there access to savings accounts and loans, or it could be at a place of work.
They may not have glossy adverts or slick salesmen, but credit unions offer a more affordable way of borrowing than payday loans. They’re also a good option for those with poor credit histories.
Credit unions have strict rules about the maximum interest that can be charged on loans. If you borrowed £1,000 over one year, for example, the most you could be charged is £67.
Loans come with no hidden charges and no penalties for early repayment, and life insurance is even built in at no extra cost. This means if you were to die before you repaid the loan, insurance would repay the loan for you.
More than a million people are members of the 400 credit unions across England, Scotland and Wales, with around £627 million currently on loan to members. To find your nearest credit union, go to the Association of British Credit Unions Limited website.
Stop: Do you really need the money?
Far from being used only in an emergency, many payday loans are now taken out by those simply wanting a new outfit, or to buy a round of drinks. It’s really not worth spiraling into any kind of debt for these kinds of purchases. Even worse, some borrowers take out payday loans or more credit to pay off other debts, which is almost always a bad idea.
Never fall into the trap of taking out credit that you know you will not be able to repay. If you are struggling with debt speak to a free and independent debt charity such as StepChange, the Citizens Advice Bureau or National Debtline
If you do need to make an essential purchase on credit, that you know you’ll be able to repay soon, make sure you’re getting the very cheapest deal. If you need money for furniture or white goods, try seeing if you can get it second hand and free from Freecycle or scan the classifieds section in your local newspaper or newsagents. eBay and Gumtree also occasionally list items that are free if the buyer collects.
Do a benefits check
Finally, if money is tight, make sure you’re claiming everything you’re entitled to. In particular you could be eligible for some benefits or tax credits if you’re a family with disabled children or you spend large amounts on childcare; if you have an illness or disability; or if you’re a carer, widow or age over 60. Use the Government’s handy benefits checker to see if you’re missing out.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.