What is a payday loan?
A payday loan is a short-term way to borrow cash intended to help you cope with an unexpected expense and tide you over until you are next paid by your employer. You can usually borrow £50 to £1,000 which you’ll need to pay back when you get paid by your employer.
You can find out more in our guide to payday loans which covers who can get one and what the risks are.
What are the drawbacks to a payday loan?
Payday loans are:
- Expensive in the short term – interest rates can be as much as 1,500% APR.
- Financially crippling in the long term – miss a repayment and the interest and penalties can quickly trap you in a cycle of debt. Find out more about how late payments can affect your credit score.
- Damaging to your chances of being accepted for credit – some lenders may refuse a credit application if they see you have taken out payday loans in the past. Read our guide to what affects your credit rating.
The best alternative to payday loans
The best alternative to a payday loan is to avoid borrowing at all. Consider if you really need that money. Payday loan firms often advertise their loans as great for paying for nights out, new clothes or other non-essential items. You will pay less for those items if you avoid the sky-high interest rates on a payday loan and save up for them instead.
A £150 pair of shoes bought with a payday loan will end up costing you 16% more over 20 days than if you had saved up for them.
Payday loan alternatives
If you are in need of quick cash, there are several alternatives to a payday loan.
Use your rainy-day fund
If you have some savings, then it’s often a good idea to use them. You are unlikely to ever earn more interest on your savings than you would pay in interest on a loan. That means spending your savings is nearly always going to be cheaper than borrowing money, especially a payday loan.
Turn to family or friends
If you borrow the money from friends or family, you’ll avoid having to pay expensive interest charges or risk damaging your credit score. Just make sure that you and the person you are borrowing from are clear about a repayment plan.
Speak to your boss
Another option is to ask your boss for an advance on your wages. If you are claiming benefits and waiting for your first payment you can ask your Jobcentre Plus for a short-term advance. This is then usually paid back out of your benefits.
Compare cheaper options
If you need to borrow the money, then there are cheaper alternatives to a payday loan. You could use a credit card. If you pay your credit card bill within 30 days, you won’t pay any interest meaning this could be a cheaper way to borrow the money.
Consider an overdraft
Alternatively, you could use the overdraft on your current account. Just make sure you check with your bank before going into the red. Some banks offer interest-free authorised overdrafts. Even if yours isn’t interest-free, an authorised overdraft has far lower charges than an unauthorised overdraft.
Look into loans
You could also consider taking out a personal loan. This will have a much longer repayment term than a payday loan – usually two years or more – and is generally for larger amounts. But the interest rate is far lower at around 2% - 10% APR compared to up to 1,500% APR on a payday loan. Also, you can repay a personal loan early without penalty.
Alternatives to payday loans with bad credit
A poor credit rating doesn’t mean you have to resort to a payday loan if you need some cash. Here are some alternatives to payday loans even if you have bad credit.
- Credit unions
- Salary advance
- Guarantor loan
- Borrow from family and friends
- Loan from the Social Fund
- Local welfare assistance schemes
Loan alternatives for bad credit
There are credit unions around the country that can lend you money at a far lower rate than a payday loan. They are non-profit organisations which means the interest rates are low as they only aim to cover their costs. Members all tend to have a connection whether its living in the same area or working in the same profession.
The drawback is you need to be a member to borrow. If you are eligible for a credit union join now and they may be able to help you with a loan in the future.
Another option if you have a bad credit rating and need some cash to tide you over is to ask your employer for a salary advance. If you are on benefits, you may be able to get an advance from your JobCentre Plus adviser.
Some lenders do offer credit cards to people with bad credit. While the interest rate will be higher than the rate offered on standard credit cards it is still far lower than how much a payday loan will cost you. Remember, if you pay your balance in full each month, you’ll never pay interest on a credit card.
If you have been rejected for credit cards or loans due to a poor credit rating another option could be a bad credit loan. You may need someone to act as a guarantor – meaning they will have to repay the debt if you don’t – or put up something you own as collateral. You can find out more in our guide to bad credit loans.
If you are claiming benefits and are desperately in need of cash, you may be able to get a Budgeting Loan or Budgeting Advance from the government. You can borrow up to £800 interest-free depending on your circumstances.
Alternatively, if you are considering taking out a payday loan to pay for everyday items such as food or heating you might be able to get help from a welfare assistance scheme instead. Your local scheme may be able to provide vouchers, access to a food bank, furniture or pre-payment cards.
There are numerous cheaper alternatives to a payday loan, they can include low interest loans or interest-free credit cards. It's worth considering them all before opting for expensive quick cash from a payday lender.