Alternatives to payday loans
ASTRONOMICAL APRS have made payday lenders unpopular among MPs and debt campaigners.
Yet millions of people continue to take them out, and it's easy to see why. They:
- lend in small amounts;
- transfer the cash quickly;
- often lend to those with poor histories;
- charge transparently, in pounds and pence and
- are a form of controlled borrowing, not an open line of credit.
Any one of those is a compelling reason to borrow.
Unfortunately, however, there are also compelling reasons not to borrow from a payday firm.
Their fees might seem transparent but they're high - usually about 2,000% expressed as an APR - and increase rapidly if the borrowing goes unpaid or is 'rolled over' a number of months.
In addition, poor practice has been reported throughout the sector: unrelenting sales and collections staff, unwanted marketing texts and emails and even misleading information on rates.
The problem is: if you don't want to put cash in the pockets of the payday lenders where do you go?
In this article we aim to answer that question, taking a look at alternatives which offer the five benefits above, without the payday sector's risks.
1. Borrowing small
Most payday loans are just a few hundred pounds, though some bigger firms are considering lending more.
Credit unions and community lenders
Most payday loan users borrow less than £1,000, a small amount in the mainstream personal loans market which typically only offers its top rates - those 6 or 7% AERs - on amounts from £7,000.
Unlike mainstream lenders, however, community lenders are set up to help their members rather than jostle for the most competitive business.
They often lend smaller amounts at much more competitive rates.
See our guide from ABCUL for more information on credit unions, though note that not all will be able to offer loans in small amounts.
Looking again at the mainstream
It's also worth noting that, though they may not advertise it prominently, mainstream banks and building societies do lend small amounts - in the form of overdrafts, credit card limit increases and even mainstream loans.
We take a closer look at that in the next sections.
2. Borrowing quickly
According to Consumer Focus, most people first take out a payday loan because they're stuck for cash to make rent or pay a bill.
In that case, time is what counts: £60 to borrow is nothing compared to the benefit of keeping a roof over your head and the lights and heating on.
Being your own bank
Better, though, is not paying the £60 by being your own bank and having borrowing potential ready for when you need it, without even having to ask.
Going into, or further into, an overdraft might seem like a good way to prolong the pain of a looming bill but negotiating with the bank for an arranged overdraft can be much cheaper than a payday loan and just as quick and simple to set up.
0% overdrafts can be hard to come by at the moment - they don't last long and usually require account holders to pay in at least £1,000 every month or a £14,200 pre-tax salary - but we do know from a lender's own research into their customers that many payday users have above average incomes so that may not be out of reach for many people.
However, any arranged overdraft is likely to be cheaper than the payday alternative.
See our guide to getting a cheaper overdraft here.
Again, credit card borrowing requires pre-planning because it takes about 14 days to get the card with a standard application and that's hardly speedy.
However, card purchases are generally interest-free for at least 45 days.
In other words, it's feasible to switch spending to the card if money runs out at the end of the month as long as, and this is important, it can be paid back in full with the next pay check so that borrowing on the credit card is interest free.
Credit union membership
Another good form of pre-planning is becoming a member of a credit union that offers a payday alternative.
As we saw above, they lend small amounts for less and joining before desperately needing the cash makes it easier to access that option.
Other forms of fast cash
Without preparation, however, there are still other options for fast borrowing.
Local councils offer interest free budgeting loans for those without savings facing a sudden emergency like not being able to make rent or having to face sudden unexpected costs after a fire or flood.
The Consumer Focus research revealed that many of those taking payday loans did so to avoid taking money from family and 2014 research agrees.
It's perhaps also worth noting, then, that there are ways to make informal lending more official.
3. Borrowing with a poor history
Many of those using payday loans consider themselves to have a poor credit history which can make the mainstream forms of pre-planning we mentioned above hard to access.
However, even people with top scores had to start somewhere and even they have to check application criteria; there's no such thing as a guaranteed credit card.
In other words, those with a poor history shouldn't assume that they can't borrow.
Instead, check out our guides to:
- being a first time credit card user
- borrowing after debt problems, even bankruptcy
- or just checking and repairing a credit history: here's how.
Current debt problems
Another alternative for those taking out a payday loan to pay people they already owe money to is a free advice service.
Debt, benefits or legal specialists can help to tackle root causes: contact details available here.
4. Knowing how much borrowing costs
If you've got an annoying sibling or cousin you've probably heard this question: what's lighter a tonne of feathers or a tonne of lead?
The answer should be obvious but when we're caught off guard - or are seven, and in a headlock - getting there still takes a minute or two.
Payday lenders do exactly the same thing but the answer isn't obvious.
What's more, a one-off fee or a high APR?
High APRs look expensive but they can be deceptive.
For example, borrowing £500 on a credit card with a 25% APR and paying back over two months with two £250 payments would cost about £6, a lot less than that rate suggests.
That's not to say that it's always the case, however.
Banks don't help themselves by introducing systems of overdraft fees which can actually cost more than a high-interest loan. Here's some working out we did for another payday guide, for example:
|Amount borrowed||Over...||Total to pay|
|Payday lender||£100||28 days||£25|
|Overdraft: Halifax arranged||£100||28 days||£28|
|Overdraft: Halifax unarranged||£100||28 days||£140|
Tricks to beat their tricks
- Compare like with like: payday lenders make a virtue of being more upfront with their fees but, as long as there's a rough point of comparison, it's not a virtue that's worth all that much.
- Work out rough estimates: don't assume that high APRs or fee systems will always be a poor choice.
5. Staying in control
One of the most interesting things payday loan users say about their decision to borrow - according to, for example, Consumer Focus' survey - is it keeps me in control.
For many people, having an open line of credit is like giving banks an open invitation to charge extra fees and, as we've seen above, an often unclear amount of interest.
Payday loans on the other hand have a clear end point: once they're paid off the borrowing is finished.
Or is it?
However, there's evidence that payday lenders pursue users - through email, text and phone calls - and encourage them to borrow again. And that it works.
Payplan interviewed 700 payday users in January 2012 and found that 47% had taken out six or more payday loans in the past 12 months and that 61% had held more than one payday loan at one time.
As we saw above, there are better ways to take control: available credit doesn't have to mean debt to pay back.
The take away:
good alternatives are hard to find
As we said right at the start, there's a reason payday loans are popular: they're offering some features which aren't offered elsewhere or - in the case of credit unions, for example - are so under advertised that many would never think to look.
We look into that more broadly in our payday loan problems guide but hopefully this article has shown that, on an individual level, there are alternatives to taking out payday loans.
Breaking the cycle
For those that feel trapped in a cycle which may lead them to unwillingly take out a payday loan in the future but not right now here's a summary of three strategies we've looked at to break that cycle:
- One of the big winners in the four categories we've looked at has been credit unions: community lenders that not only offer alternative forms of borrowing but provide all-round financial help and advice. Find out more on the find a credit union search site or call 0800 015 3060.
- The other thing that came up a few times was pre-planning - applying for an overdraft or credit card could mean more options for the future.
- Hand in hand with that is often taking the first steps to improve a credit score or get long-term money advice, again increasing options in the long term.
We also found three good options for those looking for an alternative to a payday loan right now:
- Budgeting and local council loans are little known solutions to sudden emergencies.
- Negotiation with lenders increasing a credit limit or requesting an arranged overdraft with an existing lender can take ten minutes and save hundreds of pounds yet few check whether it's an option for them.
- More negotiation advice services can help negotiate with companies if the payday loan would cover a debt or bill.