Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.
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.
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.
Fortunately, there’s a range of cheaper alternatives to explore, even if you have poor or limited credit.
If you’ve successfully put some money aside for a rainy day, this is the time to use it. You’re unlikely to ever earn more in interest on your savings than you’d pay on a loan, so it’s usually going to be the cheaper option. Plus, any money you’d have used for loan repayments can be transferred into your savings account.
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 be a lower-cost and hassle-free option.
One major downside, though, 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. It’s best to put your agreement in writing and discuss what would happen if you couldn’t pay the money back.
If you don’t already have one, speak to your bank about arranging an overdraft on your current account or extending your existing one. New rules introduced by the FCA in April 2020 mean that banks must now charge a single annual interest rate on all overdrafts, making it easier for customers to compare charges. Interest rates tend to range from 19% to 40% APR. Although this is high, it’s still likely cheaper than a payday loan.
You could also consider switching to a current account with a cheaper or even interest-free overdraft, but this depends on how quickly you need the extra cash. Under the Current Account Switch Service, switching current accounts should be completed within 7 days. You might also benefit from a switching bonus.
Buy now, pay later schemes have become increasingly popular and enable shoppers to place an order online now and pay for it later. The amount due is usually split into 3 or 4 manageable amounts, with the first payment due at the time of the purchase and the rest due over the coming weeks. Exactly how this works depends on the provider.
An increasing number of retailers now offer BNPL as an option when you reach the online checkout, which means it could be suitable if you need to make an urgent purchase. In some cases, you can also use it in-store. Payments are usually interest-free, but you could be charged fees if payments are missed. This could also affect your credit score, so it’s important to keep track of what you owe and when.
If you’re waiting for your first Universal Credit payment to come through, you may be eligible for an advance payment if you are in financial hardship. You might be able to get up to 100% of your estimated Universal Credit payment, and you then pay back in instalments through future Universal Credit payments.
If you’re already receiving Universal Credit, you might also be able to get a Budgeting Advance to help pay for emergency household costs. The smallest amount you can borrow is £100, but you could get up to £812 if you have children. Again, you repay this through future Universal Credit payments, and it must be repaid within 12 months.
If you don’t get Universal Credit, you might be able to apply for a Budgeting Loan from the government instead. To qualify, you must have been getting one or more of these benefits for the past 6 months:
Like the Budgeting Advance, you could borrow between £100 and £812. You can use the funds to help pay for furniture or household items, clothing, rent, travel costs, maternity costs and funeral costs, amongst others. You only have to pay back the amount borrowed (no interest is added), and repayments are automatically taken from your benefits. You usually have 2 years to repay it.
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, and applications are assessed on a case-by-case basis. You’ll need to be on a low income or claiming certain benefits to qualify.
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 Drafty use “custom-built online algorithms” 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.
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’s 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 out.
Credit builder credit cards are designed with bad or 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).
However, if you don’t pay off your balance in full each month, the interest charged on a credit builder credit card will be high, and it can be easy to get into a spiral of debt. If you can’t pay off the full balance, pay off as much of it as you can and always meet the minimum monthly repayment.
Credit builder credit cards come with low credit limits, but they’re usually subject to review after a relatively short time. You’ll be able to build your credit score with every timely repayment.
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.
Community Development Finance Institutions (CDFIs) are small, independent social enterprises that can offer funding to people who are unable to get a loan with a mainstream bank. They usually offer a personalised service and reinvest any profits back into the local community. However, interest rates can be higher compared to credit unions.
You can find out more on the Finding Finance website.
If you’re in employment, check if your employer has signed up to a salary advance scheme. You’ll typically be charged a fee, but 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, your company might 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 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 period. It can help you consolidate your debts into a more manageable package but will also significantly impact your credit score.
An IVA remains on your credit report for up to 6 years. During the period of your IVA (usually 5 or 6 years), 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, but it’s generally best to seek free advice first from a debt charity such as StepChange or Citizens Advice.
As handy as payday loans can be, if you have a poor credit score and require emergency funds, there’s a range of alternatives that are likely to provide a cheaper means of borrowing and should always be considered first.
If you need to cash a cheque, it may take up to 3 days to clear it with a bank. Cheque cashing services give you immediate access to your money.
Sometimes you may need a little longer to pay off your loan – this is where a bad credit installment loan could work for you. Read on to find out how to apply.
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