Alternatives Payday Loans
Looking for alternatives to payday loans? Payday loans as a form of short-term credit are a suitable product for some consumers who need cash straight away but not for others.
First, what is short-term credit? It describes a type of finance available to consumers allowing them to borrow between £80 and £2,000 over two months to twelve months.
Short term loans are very popular (over one million of them are taken out every year) but they’re not for everyone. Before you commit to any type of finance, it is first worth finding out if a short-term loan is right for you and then, if it is not, looking into all the alternatives to payday loans available to you.
Can Credit Cards be a suitable alternative to payday loans?
In 2017, there are 164 million credit cards in use in the UK today, according to the UK Card Association – that is nearly three credit cards for every man, woman, and child living in Britain.
There is a lot of choice out there at the moment for people wanting to open a credit card account. There are credit cards for people with very high credit scores.
There are also a growing number of companies offering credit cards to people wanting to rebuild their credit scores after they’ve experienced difficulties with money in the past.
But what if you need cash in a hurry? After all, some things you can pay by using a credit card and other things you cannot. Will a credit card be any use to you?
Yes. You have two options. First, with some credit cards, you can actually borrow money on it and, when you do, the cash is transferred to your bank account – that is done with something called a money transfer.
Some credit card offers do not charge for money transfers (they are normally restricted to customers with strong credit ratings) and some do.
Second, you can withdraw cash directly from your credit card at most holes-in-the-wall however there are often very steep charges you have to pay to take advantage of this flexibility.
Whether you use a money transfer or an ATM to withdraw cash from your credit card, you will pay interest on the cash you’ve borrowed just as with everything else you use your card for.
With a credit card, you get a limit – that is the maximum amount of debt you can have on your account at one particular time.
Credit card companies make the most money from consumers who are close to or at their credit limit. That is because, for people in this situation, they pay a lot more interest than someone who keeps a low balance.
Many people find it too hard to resist spending money on a credit card for something they want instead of something that they need – and that is something many credit card companies take advantage of.
How do credit cards work?
You receive a monthly bill from your credit card company and they take a payment from you. If you only pay a credit card company the minimum amount of interest, the interest you will pay back overtime is enormous.
ClearScore, the credit report experts, report that someone with a credit card balance of £2,000 with an APR of 18.9% only paying the minimum amount every month would pay £1,106 in interest charges and that it would take a borrower nine years to pay it all off.
Credit cards can be very useful however it is very easy to overspend on them.
If you do overspend, it can take decades to pay your balance off and you will pay back many times the actual amount you spent in interest.
With short-term loans online, you borrow money over a defined period for an agreed amount over a maximum period of twelve months.
Bank and building society loan
Bank and building society loans are a popular choice for people wanting to take out a lot of money at once – for example, to fund an extension to their home or to pay for a brand-new car.
For people taking out bank and building society loans, the main advantages, other than the higher amounts banks and building societies are generally prepared to lend, is the low interest rate borrowers pay back over a longer period of time.
Bank and building society loans can be for up to 7 years and, because the interest rate is fixed, the amount a borrower repays every month will not go up or down, even if the Bank of England increases interest rates.
Be careful though – if you come into money and try to pay off your loan early, some banks and building societies may charge you up to 6 months’ interest as a penalty.
Unfortunately, bank and building society loans do not tend to cater people looking for smaller amount of money. They also certainly do not provide personal loans for bad credit consumers – especially after the financial crash of 2008.
If you are looking for a loan of £500 over 6 months, it is highly unlikely that, even with a perfect credit score, that the bank will make you an offer.
Bank overdrafts are offered exclusively to a bank’s current account customers and they offer you the opportunity to spend more money than you actually have in your account.
Bank overdrafts have a limit, just like credit cards. You may have a bank overdraft with a limit of £1,000.
What that means is that you can continue to spend right up to an amount that takes your balance to £1,000 overdrawn even if there’s no actual cash left in your account after payday.
You don’t need permission from your bank manager to spend up to the limit of your bank overdraft.
Bank overdrafts have their own problems however and they have been attracting a lot of controversy lately.
The debt charity StepChange have accused banks of using overdrafts to trap 2 million Brits in “permanent” debt, as reported by the Guardian. Some people are so far into their overdraft that, by the time their pay hits their bank account, they never go back into the black.
Worse problems await bank overdraft customers who spend past their limit. These customers are victims of something called an “unauthorised overdraft”.
Customers with unauthorised overdrafts can end up paying more in fees and interest than borrowers who take out quick loans for “bad credit customers”, according to BBC News.
In fact, customers taking out quick loans for bad credit situations are protected by Financial Conduct Authority rules on lending whereas bank overdraft customers are not.
Bank overdrafts can be withdrawn at any time whereas borrowers using quick loans for bad credit situations always have an end date on which their account is paid off in full.
Credit Unions can also be preferable to short-term credit
You can find credit unions all over the UK – click here to search for ones local to you.
Credit unions offer consumers the opportunity to save money and take out loans – much like a bank but there are a few big differences.
The difference between credit unions and banks is that they are owned and operated by the people who use them. Many also offer insurance, ISAs, and even mortgages.
If you need money in a hurry though, credit unions are generally not an option unless you have been saving with them for a certain time.
The money that credit unions lend out to members is taken from the pool of savings that every member contributes to. You need to have contributed to a credit union before you can take a loan out, in most cases.
Like instant loans online, the amounts borrowed are small – normally between £50 and £400.
Once you have made an application, you may have to wait a few days for it to be processed unlike with instant loans online where the money can reach your bank account in just a few minutes.
Personal loans are generally loans made directly to borrowers.
Sometimes, a borrower does not have to offer security to the lender in case they cannot pay the loan back.
Loans can be secured on homes (as with a mortgage), on cars (as with logbook loans – more on that later in the article), and on valuables (as at a pawnbrokers). Other times, to get a personal loan, a borrower must offer security.
Personal loans include bad credit loans, payday loans, bank and building society loans, and loans that you might take out from a specialist internet lender.
The type of personal loan you will qualify for will depend on your credit score.
The better your credit score, the more likely you are to be offered higher amounts by lenders at lower interest rates.
The lower your credit score, the more likely that the type of loan you will be successful in applying for are payday loan and short-term loans.
Guarantor loans are loans often used by people with bad credit where someone else is nominated to pay the loan back if you are not able to.
They are relatively new here in the UK and they are also controversial – the Financial Conduct Authority are currently investigating the guarantor loan market after negative press coverage like this story in the Sun newspaper.
With guarantor loans, before you apply, you have to find someone with a good credit history to nominate as your guarantor. If you cannot keep up the repayments on a guarantor loan, the person you nominate will have to pay it back.
Revolving credit shares many features with both bank overdrafts and credit cards. Like with a bank overdraft, you have a limit and you can spend right up to that limit if you want.
Unlike a bank overdraft and just like a credit card, you make a monthly repayment to your revolving credit provider.
When you make a monthly repayment to your revolving credit provider, part of that payment is all of the interest owed and the rest of it is to pay down your balance.
Personal finance experts have expressed concern about revolving credit facilities if they are used by borrowers who “live” in their bank overdrafts as it is equivalent to using one type of finance to service the debts on another.
Unlike taking out a loan until payday, revolving credit facilities do not have an end date and unless a borrower manages their revolving credit facilities carefully, they may find themselves paying much more in interest over a longer time than by using a loan.
Borrowing from family and friends
For many people, borrowing from family and friends in times of financial distress is the first thing they think of.
There are many advantages to borrowing from family and friends, the main one being that your friend or family member is unlikely to charge you any interest on the amount they’ve lent you.
They can also be much more flexible about repayments than a company offering fast cash loans, for example.
With house prices as high as they are, friends and family members
There are, however, significant disadvantages to borrowing from friends and family.are being called on more than ever to help out – we have all heard of the Bank of Mum and Dad.
The main reason behind many UK divorces is money and, in the way that money can poison a marriage, it can also harm a long-held and cherished relationship with a friend or a family member.
While a friend or family member may not try to secure a county court judgement against you for not paying them back, it could be that your relationship with them may never recover because of the bitterness and loss of trust caused by a fall-out over money.
The Money Advice Service have interesting and helpful advice on their website about borrowing from friends and family.
Better financial management
It is always better to budget than it is to borrow – to use better financial management.
If you do need money in a hurry and your savings are not enough to cover emergency spending, then make sure that you consider all the options available to you before deciding to apply for any form of finance.
Remember that payday loans and short-term loans should only be used for emergencies like an unexpected bill, medical expenses, funeral expenses, or if your car or a home appliance breaks down and it needs repairing.
You should never take out one form of debt to pay off the interest on another form of finance.
Many consumers use a technique called “monthly budgeting” for better financial management.
With this type of budget, you take away all of your monthly expenses from the amount you are paid after tax. You are then left with something called “disposable income”.
Better financial management means finding ways to increase your level of disposable income even though you may not be taking home any more money. You can do this by:
- shopping at discount stores,
- getting insurance providers and energy companies to compete for your business via comparison sites,
- giving up gym memberships if your level of use does not justify the cost, and
- switching to 0% interest credit card deals by transferring your balance from a more expensive credit card.