If you’re struggling with your finances, a quick and easy payday loan can seem like a good option. But there are many other far cheaper alternatives.
Payday loans have been heavily in the spotlight this week. First, Wonga went on a PR offensive, premiering a film called 12 Portraits which featured 12 of its customers. Then there was a string of interviews in which the company’s Niall Wass told anyone who would listen the majority of Wonga’s customers were happy with its service.
Then representatives of three of the biggest payday lenders were grilled by a committee of MPs and naturally defended the industry and its practices.
While the industry may have cleaned up its act compared to a year ago, the simple fact remains that payday loans are an extremely bad way to borrow. Several mortgage brokers have also spoken about the detrimental effects using payday loans can have on any future mortgage application, as lenders see them as a sign of desperation and an inability to manage money.
But if money is really tight, what are the alternatives?
First steps
Cut your spending and budget
This should be the first thing you should do.Just looking at your monthly spending habits can make you realise you need to cut some things out completely. And if you’re using payday loans to pay off for nights out and new clothes then you’re already in deep trouble.
A budget can get you back on track so you have enough for both bills and treats.
Why not check out our free, secure Money Track budgeting tool?
Take out a 0% credit card
If you have a good credit rating but your debts are slowly mounting up and you’re only able to make the minimum payment on your credit card or you have a large overdraft, a 0% credit card could give you some valuable breathing space.
If you have card debts you want to transfer, you could get up to 30 months with no interest to pay using a 0% balance transfer credit card. All you have to pay is a fee, which is a small percentage of the debt you’re transferring.
If you have an overdraft, you can take a card that offers a 0% money transfer period. This allows you to transfer money into your current account and it will just cost you a percentage of the amount you’re borrowing (usually 4%). At the moment, you can get a 0% money transfer for 27 months with the MBNA Platinum and Fluid 27-month cards. Compare 0% credit cards
Ask for a pay advance
The best payday loan could come direct from your employer.
Asking for an advance on your wages could mean you meet the shortfall an unexpected bill or car repair causes, without the risk of falling into a pit of debt. Companies with a good cashflow may be willing to pay an advance on your wages and usually take the amount out of your next payslip.
Another way your employer may be able to help is by allowing you to do some overtime to boost your pay.
Turn to friends and family
Turning to your family or even your friends for a loan could prevent you from falling into a spiral of debt. They may even be able to lend you the money interest free.
Just remember to treat paying back a friend or family member as seriously as you would an official lender. After all, you don’t want them to fall into debt because you haven’t lived up to your side of the deal. If you want to make it official and reassure those close to you that you will repay, write down an agreement clearly marking the exchange as a loan not a gift.
Sell some old stuff
From CDs to DVDs, games to gadgets, if you have things you don’t use that could be cashed in then now is a good time to do it.
You could sell them online on sites such as eBay or Amazon or in high street shops such as Cash Convertors or Cash Generator.
Ask your bank for an authorised overdraft
An authorised overdraft with your bank is an alternative form of borrowing that is far more affordable than a payday loan.
Overdrafts that are agreed formally, rather than used accidentally, which are known as unuathorised overdrafts and can cost a small fortune, typically have rates between 12% and 20% AER. However, the Nationwide FlexDirect account offers a fee- and interest-free overdraft for a year, so long as you pay in £1,000 a month to the account.
Next steps
If money is still tight after you’ve exhausted all the options above, then find out if any of these are viable.
See if you’re entitled to benefits
The benefits system in the UK is highly complex, so many of us are unaware of the benefits we may be entitled to.
If you are pregnant, on a low income, caring for someone, have been bereaved, aged 60 or over, ill or disabled or even if you are unemployed then there is a chance that you could be entitled to a range of benefits such as Working Tax Credit, Child Benefit, Income Support, or Jobseeker’s Allowance.
Use this handy benefits checker on the Gov.UK website to double check you are claiming all the benefits you qualify for.
Apply for a credit union loan
Credit unions are not-for-profit, community-based organisations that provide transparent savings accounts and affordable loans to its members. Credit unions have a common community bond, so you could find yours where you live or where you work.
Many of them now offer payday loans at far lower rates than payday lenders. The only catch with credit unions is you often need to be a member before you can borrow.
To search for your nearest, use the Find Your Credit Union website.
Look into a budgeting loan
A budgeting loan is available from the Government to those on income support, income-related employment/support allowance, income-based jobseeker’s allowance and pension credit and is available if you need to pay for a particular range of expenses.
The loans are between £100 and £1,500, are interest free (so you only pay back the amount you borrowed) and you have two years in which to pay them off.
Seek free debt advice
If your finances are out of control and you consistently turn to payday loans, you should seek advice. There are a number of charities that are dedicated to helping those in financial difficulty such as StepChange Debt Charity, National Debtline and the Citizens Advice Bureau.