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Alternatives to payday loans
When you have a short term financial crisis, it can be difficult to figure out what options you might have to obtain funds in a hurry.
Payday loans are one quick and easy option, but there may be other avenues you can explore as well.
While payday loans are suitable for short term lending, they can work out to be expensive in the longer term or if you miss repayments.
What you need to know about payday loans
The payday loan market today is very different from how it was a few years ago.
The collapse of the big lenders like Wonga and QuickQuid came about following a tightening of the regulations.
It has left a new breed of payday loan companies focussed on convenience and maintaining the standards expected by the Financial Conduct Authority (FCA).
The FCA rules explicitly state that short term credit at a higher rate of interest should never exceed 0.8% interest per day. That works out at 80p a day on a £100 loan, or repayment of £111.20 if you took it out for two weeks.
So you can see why payday loans aren’t necessarily prohibitively expensive if you ensure you only take it out for a few weeks then repay it in full.
However, if taking out the payday loan in month one leaves you short come month two, you could find yourself taking out another. That can become a cycle – or spiral – if you are not careful.
Rolling over payday loans is also an option if you are unable to repay on your next payday. This may be an option but take care to ensure this also doesn’t become a habit or cycle.
Before you do opt to take out a payday loan. Remember the golden CASH rules:
C – Choose your lender wisely and carefully (not all payday lenders are as scrupulous as they should be)
A – Apply for as little as you need (don’t be tempted to be extravagant)
S – Short term only – payday loans are only suitable for short term lending
H – Help – seek advice if you think you think you will have problems repaying your payday loan. In the first instance, speak to the lender – they will probably be able to help. If it’s more serious, seek advice from an independent and impartial service.
The reality for many of us is that if you have a poor credit score, it can seriously prohibit your ability to obtain cheaper credit. So what might be a suitable alternative to a payday loan for you?
Defer the expenditure
Payday loans should only be considered for essential expenses and one-off events. Food, car repairs, appliance breakdowns, utility payments which may avoid you being cut off or bills that can’t be delayed are examples.
For anything else, it’s better to wait. Take a moment to consider the consequences of what might happen if you don’t make the payment until payday. If it will not cause you too many problems, think about whether you can hang on.
Talk to your creditors when there is a problem
Most companies would rather get paid a little less than not get paid at all. Taking action against customers costs lenders money and they prefer to avoid this unless it is absolutely necessary.
Talk to the creditor and ask what options might be available. Will they be happy to wait or will they be satisfied to spread the payments over a longer period? Remember to work out whether this might result in higher costs in the long run which could tip you into further financial problems.
If a bill has landed that’s significantly larger than you were expecting – and this can easily happen with gas, electricity or mobile phone bills – give the company a call and see if there are options for making an initial reduced payment or if you can arrange a payment plan.
Borrowing from family or friends
Sometimes it can be daunting to turn to those close to us for help. It can be a little awkward, embarrassing even. But if you can find a friend or family member to borrow money from, it could prove to be the cheapest and most hassle-free option.
The friend or family member might not expect you to pay any “interest” on the loan and may well be more flexible on when they would expect it to be paid back.
But be careful, because if something does go wrong and you fail to repay, you could risk having to face an even more awkward conversation or damaging the relationship.
If you are going to borrow a larger amount from someone you know, it can be helpful – and reassuring to both of you – to put something down on paper.
If a friend or family member asks you if you can lend them some money, it can be really difficult to refuse. If you will get into difficulties yourself, explain this to them.
Again, it can be a good idea to put the details down in a written agreement. If the very worst case was to happen and they were to die, you may need to claim the money back from their estate.
Smart credit facilities
A newer option in the fast, small loan market has been the launch of tweaks to the payday loan service with what many call “smart credit facilities”.
Some of these lenders charge a flat monthly fee in return for interest-free loans. Another innovation is the use of “open banking”. Here, the lender is allowed read-only access to your bank account to conduct affordability checks accordingly.
These revolving lines of credit tend not to have a maximum or a minimum but are tailored to your present financial circumstances based on your bank balance, income and expenditure.
This type of borrowing can be a little complicated to understand as the resulting available credit and repayments change over time. Repayments are triggered automatically when money comes into your bank account. Be careful with this as it could then leave you short for making other essential payments.
The interest on smart credit facilities is capped at the same rate as a payday loan – because they are also classed by the FCA as “high-cost short-term lending”.
An arranged overdraft
Arranging an overdraft with your bank can be a good idea. You will be familiar with the bank and they will be familiar with you.
If you are approved for an overdraft, it might not be available instantly. Sometimes it can take a couple of weeks for them to check your details etc.
You could consider switching your bank account to one which has a better overdraft facility than your own. Switching bank accounts has never been so easy thanks to the free seven-day Current Account Switch Service.
If you are switching bank accounts you may be asked to prove you have an overdraft and what the limit is by providing copies of bank statements to the new bank.
The new bank may turn you down if you have a very large overdraft or have been in it for a long time. There is no guarantee at all that they would offer you a larger overdraft.
The cost of overdrafts has come under close scrutiny from the FCA recently. Some are very expensive – more so than payday loans. The FCA now requires banks to be more transparent with the charges and interest that applies to overdrafts but in some cases, this has made some overdrafts more expensive.
To apply for an overdraft you will be subject to a credit check. For many people with poorer credit ratings, overdrafts are simply not available and you may be offered a basic bank account which has no overdraft option at all.
Credit unions are most often small not-for-profit organisations set up by a group of people or a community to offer financial services to its members. There are some larger umbrella credit union organisations who operate local branches.
Often, the credit union is made up of members of the same community or people who work in the same profession. For example, the police force has its own credit union. Some employers, such as local councils, will partner with local credit unions to offer staff access to financial services.
Many credit unions offer short term loans with a lower interest rate than a payday loan or other forms of borrowing.
Often, repayments on loans will be able to be taken directly from salaries, which gives the credit union some certainty you will make a payment on payday. It could save you the hassle of monitoring when the payment for your loan will be taken from your bank account.
To borrow from a credit union, you have to be a member. Often the credit union will expect you to also open a savings account with them in which you will make regular deposits. This could add to the actual cost of borrowing but the intention is to encourage members to behave in a responsible manner financially and consider building up savings.
Once you have acquired some savings, you could dip in on the next occasion you find yourself needing some cash. But of course, this takes time.
Credit unions are still required to undertake credit and affordability checks. They often take a dim view of members with County Court Judgements (CCJs) against them and may ask for proof you have a valid and reasonable repayment in place for repaying the CCJ.
Most credit unions will have a local branch you can visit to discuss your situation and many offer local outreach services in community venues to enable people to access them easily.
Each credit union tends to vary in how it operates, what it offers, what kind of online presence they have – if any – and the speed with which they can arrange and deposit a loan. Some offer what they call payday loans. Some could be very quick in getting back to you and arranging the deposit whereas some could take a while.
You can find out if there is a credit union near you here and access information on whether you may be eligible to join.
Universal Credit budgeting advance
Universal Credit certainly has its detractors. Much has been made in the media of the hardships many have endured by having to wait weeks for their first payment to arrive.
However, if you’re waiting for your first Universal Credit payment to come through, you may be eligible for a budgeting advance. You will be asked why you need the advance and you should get a decision within 24 hours, but it can take up to five days for the money to actually arrive.
Whatever you do borrow, you will be required to pay it back via instalments taken from future Universal Credit payments. This could cause you cash flow problems later down the line.
Local welfare assistance
If you are claiming benefits and find that you are struggling to pay for living essentials like food and shelter, you might be able to seek assistance from your local welfare assistance scheme.
The terms are dependent on what part of the UK you reside in and vary from council to council. The schemes are intended for people in extreme hardship only and local authorities have strict criteria for eligibility.
Salary advance schemes
If you’re in employment, your employer may offer a salary advance scheme. This would allow you early access to the wages you’ve effectively already earned.
Salary advance schemes are not particularly widespread though some private companies have set up in recent times to manage schemes for firms. Some employers also offer staff loans but this has become quite rare these days.
If you own a car outright, a logbook loan lets you use it as security to borrow against. The rates may be a little better than that of a payday lender but a logbook loan is still usually an expensive way to borrow. If you fail to repay the loan or fall behind for a prolonged period, you could potentially lose your car.
Credit builder credit cards
Credit builder credit cards are available for people with bad credit. They have less stringent application criteria than most other credit cards. They are designed to enable people to improve their credit score by showing they are making regular payments on a line of credit. Whether this will significantly improve your credit rating depends on what other borrowing appears on your file.
You will pay interest on what you borrow and have to make a minimum monthly repayment. The interest rates will be higher than other credit cards.
There are dangers with credit cards. The lending can drag on and on if you can only afford to make the minimum monthly payment which often covers just the interest and not much of the actual borrowing.
If there is no alternative to a payday loan
If you have explored all other options and still can’t raise the money you need, you may feel a payday loan is right for you.