Payday loans are a popular option for individuals who are in need of a small amount of cash quickly and are often used to help bridge the gap until the next payday, hence the name. They offer a quick and simple solution when an emergency cash situation arises, giving you access to funds quickly and effortlessly. If you find yourself in a difficult financial situation, and you need some money quickly, then a payday loan can be a realistic option.
Many payday loans end up being extremely expensive, as they have high interest rates and additional charges for things like late payments. If you do miss payments on payday loans, it can result in further debt and eventually become unmanageable.
When you need to borrow some money quickly, you might feel like a payday loan is the only option. However, there are other options that you should consider before deciding what financial product is right for you. This guide covers our top alternatives to payday loans.
Credit cards
Payday loans have high interest rates, and even the most expensive credit card is likely to have a cheaper interest rate than a payday loan. Credit cards are often a great way to cover unexpected emergency expenses, and they will usually save you money compared with payday loans. Credit cards allow you to pay off your balance as and when you please, as long as you are making the minimum payments, unlike payday loans that will have to be paid back on a set date.
Credit cards can make acquiring cash more expensive as there are usually additional fees involved, but these will often still be cheaper than a payday loan. Most credit card lenders will run a credit check, unlike many payday loan lenders, however, if you do have a poor credit rating, a credit card doesn’t have to be out of the question. There is now a selection of lenders that offer credit cards specifically for those with bad credit.
If you do have a poor credit rating, getting a credit card and using it responsibly can help you to build your credit score. This could help you out in the future and make you more likely to be accepted for future borrowing.
Overdrafts
Another way of borrowing money for a short period of time is to arrange an authorised overdraft on your current account. Most banks will allow you to add an overdraft, and this could be for as little as £100 if you don’t want to borrow too much. Sometimes arranged overdrafts can be fairly expensive in terms of interest, but it will usually be cheaper than using a payday loan if you keep within the overdraft limit.
Going over your overdraft limit will result in additional charges, so it is important to keep within your allowance. When you use an overdraft, you can use the money as cash or for card payments and direct debits at no extra charge, unlike with a credit card.
It is vital to avoid unauthorised overdrafts as they will come with high charges and fines and can be very difficult to get out of. An authorised overdraft could happen because you have gone over your overdraft limit, or have no authorised overdraft set up.
Credit unions
Credit unions are a community-run loan and savings providers. They are traditionally small, non-profit organisations designed to help a community, although recently they have started to become more commercial. In the UK at the moment there are more than 300 credit unions across the country.
These credit unions are often a much cheaper alternative to payday loans because there is a limit on the amount of interest they are allowed to charge, this limit is currently 3% a month in England, Scotland and Wales.
It can be worthwhile setting up an account with your local credit union and begin building a relationship with them. They will be more likely to lend to individuals who already have accounts and use their services.
Borrow from family and friends
If you want to avoid paying interest altogether, and not risk getting into further debt with payday loans, it can be worth speaking to friends and family. If you have someone who will be willing to lend you money in an emergency situation, then this can be a much cheaper and more sensible option than borrowing from a payday loan lender or bank.
If you choose to borrow from family or friends, be sure to discuss it in detail and decide with them a realistic budget and repayment plan, and what the situation will be if you do repay them late.
When borrowing from family or friends, it can be worth putting an agreement into writing to avoid any disputes further down the line.
