Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
15 alternatives to payday loans
Payday loans are expensive but convenient at best, and the start of a downwards debt spiral at worst. So when you're strapped, where else can you turn? You may have more options than you think.
When an expense crops up and you find yourself short of cash, payday loans should always be considered a last resort. They’re fast and simple, but eye-wateringly expensive. “High-cost, short-term credit”, as it’s defined by the Financial Conduct Authority (FCA), should never cost more than 0.8% per day, but sadly most payday loan providers have opted simply to charge the maximum allowable, which, on a debt of say £200, equates to £1.60 per day.
There can be fees involved too if you’re late making a payment. Missing a payday loan repayment generally means both a penalty fee and additional interest, and can leave you in a debt cycle from which it’s hard to escape.
Let’s look at some of the alternatives, particularly for those with poor or limited credit.
What's in this guide?
- Defer the expenditure
- Strike a deal with your creditors
- The bank of mum and dad/friends and family
- Organised overdraft
- Universal Credit budgeting advance
- Local welfare assistance
- Smart credit facilities
- Get your salary early with a digital bank
- Credit builder credit cards
- Borrow from a credit union
- Salary advance schemes
- Guarantor loans
- Logbook loans
- Homeowner loans
- An individual voluntary agreement (IVA)
Defer the expenditure
Because they’re so expensive, payday loans should only be considered for essential expenses. For anything else, it’s better to wait.
Strike a deal with your creditors
Pretty much all companies would rather get paid a little less than what they’d initially hoped than not get paid at all. If you’ve received a bill that’s significantly larger than you were anticipating, give the company a call and see if there’s wiggle room, or if you can arrange a payment plan.
The bank of mum and dad/friends and family
Sometimes it can be daunting to turn to those close to us for help. But if you can find a friend or family member to borrow money from, this could prove to the cheapest and most hassle-free option.
One major downside of this option is that, if something goes wrong and you fail to repay, you risk damaging relationships rather than just getting a fine or paying more interest.
Overdraft fees have come under pretty close scrutiny from the FCA lately – some were more expensive than payday loans. But, if you can negotiate a favourable authorised overdraft (or extend an existing one), it should work out cheaper than a payday loan.
It can take a couple of weeks (and if you’re considering a payday loan, you may not have that luxury) but you could always switch to a current account with a better overdraft facility. There are usually some decent switching bonuses knocking around too.
Universal Credit budgeting advance
If you’re waiting for your first Universal Credit payment to come through, you may be eligible for a budgeting advance.
Whatever you borrow, you’ll pay back in instalments through future Universal Credit payments.
Local welfare assistance
If you’re claiming benefits and are struggling to pay for 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.
It might also be possible to apply for an interest-free Budgeting Loan from the Social Fund.
Smart credit facilities
With payday loans becoming less and less popular, but the need for fast, small loans not going anywhere, a handful of innovators are stepping up to fill the gap. Creditspring, for example charges a flat monthly fee in return for convenient, interest-free loans when you need them – a bit like an insurance policy.
Companies like Tappily use open banking to make a read-only connection with your bank account to conduct in-depth affordability assessments (that may give a fuller picture than simply your credit score) and offer an ongoing credit facility.
Creditspring membership: More than a loan
- Borrow up to £500 twice a year, available on demand.
- Monthly membership fee of £8 or £10.
- Repay each advance in up to 6 monthly payments.
- 0% interest rate – only pay back what you borrow plus the monthly fee.
Representative example: Total amount of credit of £1,000 over 12 months. The first payment for each advance is £83.35 followed by 5 monthly repayments of £83.33. 12 monthly membership payments of £10. Rate of interest 0% p.a. (fixed). Representative APR 43.1% and total payable: £1,120.
Get your salary early with a digital bank
Some free current accounts (such as Monzo) now allow you to get your salary one day early. It’s just a few hours in advance, but could still help you if, for example, you’re due to pay the rent the day before you get your salary.
What is more, if payday falls on a Monday, you’ll get your salary on the previous Friday, which could make a difference if you’re struggling to make it to the end of the month.
The feature exploits the slowness of the Bacs system (through which most employees are paid by their companies) and is completely free, so it’s at least worth trying it out.
Credit builder credit cards
Credit builder credit cards are designed with bad/limited credit in mind, and as such have more lenient application criteria than most cards.
Almost all credit cards won’t charge you interest if you clear your balance in full each billing cycle, though that generally doesn’t apply to cash advances (withdrawing cash using the card).
Bear in mind it’s easy for credit card debt to drag on and on, due to the low minimum monthly payment requirements. A better interest rate is one thing, but if it’s compounded over, say, two years, it could work out more expensive than a really high rate over just a couple of weeks.
Credit builder credit cards come with personalised credit limits, but they’re usually subject to review after a relatively short amount of time. You’ll be able to build your credit score with every timely repayment.
Borrow from a credit union
Credit unions often offer more competitive, capped rates on personal loans than banks or building societies.
However, it might be tougher to be approved for a larger loan from your local credit union. There’s also the issue of eligibility. Although most areas of the UK have at least one credit union for local residents, you’re likely to be limited to the deals offered by a handful of credit unions at most.
Salary advance schemes
If you’re in employment, check if your employer has signed up to any salary advance scheme. These schemes work out at a fraction of the price of a payday loan and are all about unlocking the wages you’ve effectively already earned. Alternatively, they may simply offer employee loans – that’s when your employer pays you earlier than usual as a one-off.
With a guarantor loan, a friend or relative must promise to step in and repay the loan if you fail to do so. They’re not cheap, but the rates are generally lower than payday loans.
Your guarantor will need to have very good credit and it helps if they’re a homeowner.
If you own your car outright, a logbook loan lets you use it as security for a loan. Although the rates are better than your average payday lender’s, it remains a very expensive way to borrow. Needless to say, if you fail to repay the loan, you’ll stand to lose your car. Proceed with caution.
If you own a home (with a mortgage), and are serious about wanting to get out of debt, then a secured “homeowner” loan lets you leverage the equity in your property as security for a would-be lender. Offering substantial security in this way reduces the risk to the lender, which in turn usually means lower rates.
It’s a big decision, and as such requires careful thought. Going from considering a payday loan to taking out a second charge mortgage against your property is 0-60 stuff, but in some cases means a realistic, long-term response to financial difficulty, rather than simply “keeping the wolf from the door” for a month or two.
An individual voluntary agreement (IVA)
If your money problems are ongoing, then borrowing may not solve your problems.
An IVA is an agreement between you and your creditors to pay your debts back over a certain amount of time. It can help you consolidate your debts into a more manageable package, but will also have a significant impact on your credit score.
It will remain on your credit report for up to six years. During the period of your IVA (usually 60 or 72 months), you’ll only be able to obtain up to £500 worth of credit and you’ll have to get approval from your insolvency practitioner to do this. Companies like Debt Free Direct can help you through the process.
The bottom line
As handy as payday loans can be if you have a poor credit score and require emergency funds, these alternatives are likely to provide a cheaper means of borrowing money.
Doesn’t the government offer an alternative loan?
The government has explored this option, but it’s not currently available. If this option did become available, since there’s no profiteering involved, there’s a good chance it would shoot to the top of the list of sensible ideas when you’re short of cash.
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