What are the best payday loan alternatives?
When you're suddenly confronted with an unexpected cost and don’t have the funds to cover it, you may be tempted to rush to find a quick loan solution. One option you might consider is a short term loan or a payday loan, as most of these loans have a relatively straightforward application process. However, payday loans are also a costly way to borrow money, and it's essential to make sure you can afford the required monthly payments on time.
Before making a hasty financial decision, it is worth taking your time to first research and consider all the options. Alternative solutions may not always be so obvious, but they may be better suited to your financial position – and cheaper.
So, what are the best payday loan alternatives?
Bank Overdraft
A personal loan or a bank loan
0% purchase credit card
Ask for a pay advance
Ask a friend or family
Credit Union
Credit builder credit card
Gather the facts
Deciding how to get money to cover a financial emergency will depend on your personal and financial situation. That's why, before anything else, you should gather the facts. These include checking your credit history and score to see if lenders will consider you favourably. Also, make sure you have a good idea of your current monthly expenses and existing obligations. And most importantly, know what you can comfortably afford to pay as repayments each month.
TIP: Gathering the facts first may save you a lot of trouble later. You may find that a short term loan, or a payday loan, or any form of credit for that matter, is not be something you can afford or need.
The alternatives to payday loans
Payday loans or short term loans have a high Annual Percentage Rate or APR (for more information see "What APR Means For You”. The average APR for some payday loans can be up to 1,500%, compared to an average of 22.8% APR for a typical credit card.
Here are MustCompare’s top suggestions for payday loan alternatives:
Bank overdraft
A bank overdraft lets you use more money than you have available in your bank account, effectively allowing your account balance to go below zero. If you have a current account, then you may already have an overdraft facility in place with your bank. Otherwise, you may be able to apply for an overdraft with your bank.
In the UK, overdrafts range from 15% to 39.9% EAR. EAR or Equivalent Annual Rate is a way of representing the overdraft interest rates (these rates exclude fees that some banks may charge you in addition to interest). EAR rates for overdrafts are a standard measure that all banks use; it makes comparisons easier and fairer.
As of April 2020, overdraft interest rates were capped at 40%, and although overdrafts are still relatively costly, they are a cheaper option than payday loans. So as a one-off solution and if you are not experiencing financial difficulties, bank overdrafts could be an alternative.
Banks are also now required to be clearer about their overdraft costs. You will find that most have an overdraft calculator, making it easier to compare cheaper options. Additionally, some banks offer an interest-free overdraft buffer (this means if you do go into your overdraft, your bank will not charge interest). These range from £15 to £250.
A personal loan or a bank loan
If you have a good credit score, then you may want to look at and compare personal loans. When compared to short term loans, personal loans are usually for larger amounts of money and repaid over a longer period. You could consider taking out a personal loan and then repaying it early. However, a lender may charge you an early repayment fee (this is a cost to settle your loan early). Be sure to check the terms and conditions or confirm directly with the lender what early repayment fees you may have to pay.
Nonetheless, a personal loan or a bank loan will still be cheaper than a payday loan.
If you need more information on personal loans, see the MustCompare Guide to Personal Loans.
0% purchase credit card
Again, if you have a good credit score, a 0% purchase credit card might be another option worth considering. 0% purchase credit cards make it easier for you to pay for something by spreading the cost over an agreed interest-free period (typically up to 20 months for new purchases).
However, even though you pay 0% interest, you will still have to make minimum monthly repayments.. Missing a repayment may mean you lose your 0% deal and are charged a £12 fee. If you miss a payment, your credit report could also be marked. As with all credit forms, it's important not to borrow more than you can afford.
Ask for a pay advance
A pay advance or part of your salary in ahead of payday could be an option worth discussing with your employer. Salary advance schemes are also becoming increasingly popular and allow you to have access to part of your salary (generally up to 50%), for a fee as opposed to paying interest rates. To apply for a salary advance, your employer will need to be enrolled in the scheme.
REMEMBER: If you take an advance on your salary or wages, you will have less money going into your account come payday - that is less money to cover bills, mortgages, etc.
Ask a friend or family member
Money can be a sensitive subject to talk about even with a trusted family member or a good friend. You should be confident that you will pay back what you borrow, and borrowing won't adversely affect your relationship. However, we have listed it as an alternative as it could be one of the most cost-effective options available.
Credit union
Credit unions are small, non-profit organisations that offer financial support to members who share a common ground. For example, where you live or the type of work you do. Members pool together to support the credit union and help others who may need financial assistance.
They are an alternative to traditional banks; there are over 500 credit unions within the UK. Credit unions offer short term low-value loans, typically between £50 to £3,000. Most will charge you an average of 1% interest a month per loan. However, this will depend on the credit union.
Interest charged by credit unions is capped at 3% a month or 42.6% APR (Northern Ireland has a 1% cap).
You can find a credit union near you on the Association of British Credit Unions website.
Credit builder credit card
Getting credit may be difficult when you have a bad credit score or no credit history. Credit builder cards are suited to people who have a bad credit rating. You may only be able to borrow small amounts of money, and the interest rates may be higher than other credit cards on the market. However, as long as you make payments every month, you should see an improvement on your credit rating.
An improved credit score will help you get better deals in the future. For more information on credit scores see - Improve Your Credit Score: 10 Simple Steps.
Summary
Making a rushed financial decision when it comes to borrowing money can dangerous, especially when cheaper alternatives are not explored and repayments are not realistic. It's important to fully understand the terms and know you can comfortably afford the repayments before you apply, to avoid getting into any future money problems.
Researching and comparing financial products may help you find alternatives that are cheaper than common, popular products such as payday loans or short term loans. You may also find our article "Is a Short Term Loan Right for Me?" of interest.