Alternatives to payday loans
If you need to borrow money and are thinking of getting a payday loan, stop to consider your options. Although easy to set up, a payday loan can quickly turn into a problem debt for many people. It can also affect your credit rating if you don’t pay it back on time.
Borrowing to pay for everyday essentials
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A payday loan is almost certainly not the answer if you need the money to pay household bills, rent or a mortgage, or to pay back people you owe money to. If you’re struggling to pay for the essentials, speak to a debt adviser. They can help you do a budget, prioritise your bills, talk to everyone you owe money to and see if you can agree a repayment plan.
If you’d like someone to do this on your behalf or some expert debt advice, there are lots of organisations that can help with free, confidential advice. There’s no need to spend money getting a debt management company to help you sort out your money worries.
Money for non-essential spending
Payday loan companies often advertise using payday loans for things like nights out, new clothes or other treats. But if you do this, you’ll end up paying much more than if you waited and saved the money to pay for them. And if you just can’t wait, there are usually far cheaper ways to borrow.
To find out where your money goes each month:
- Use our Budget planner
- Keeping a spending diary
- Use our Quick cash finder to see where you can make savings
Find out more in our guide What if you can’t afford to save?
Better ways of borrowing
Ask for a pay advance
If you need money before payday, it’s always worth asking your employer if they’ll give you an advance on your wages.
If you’re claiming benefits and waiting for your first payment, or if your money is late you can ask your Jobcentre Plus adviser for a short-term advance. Normally you’ll need to pay this back out of your future payments.
Borrowing from family and friends
Borrowing emergency money from a family member or a friend can help you avoid the risks that go with payday loans. But do make sure that both you and the person you’re borrowing from take the time to:
- Work out a budget and a repayment plan
- Discuss what will happen if you’re late paying it back or don’t repay it at all
- Put your agreement in writing.
Read our guide Should you borrow from family or friends?
Using a credit card
If you’ve already got a credit card
You might be able to ask for a temporary increase in your credit card limit. But make sure you pay back the extra in full at the end of the month. Try to repay as much as you can each month as credit cards can be expensive if you leave debt owing or exceed the credit limit.
Read our guide Ways to increase your credit limit.
If your credit card application has been turned down
There are credit cards especially for people with poor credit scores and some of these companies accept people with County Court Judgments (CCJs). They charge a much higher rate of interest than other cards but so long as you repay all or most of the balance each month they will be still cheaper than a payday loan.
Find out more about credit cards for poor credit on the Money Saving Expert website.
Not sure you can pay off the balance each month?
If you don’t manage to repay the balance on your card each month, it’s still likely to be far cheaper than a payday loan. However, there will be cheaper ways to borrow. So only make a credit card your first option if you know you’ll be able to pay the balance off.
Using an authorised overdraft
If you have a current account you may be able to get an authorised overdraft - or an overdraft extension - from your bank. The interest charged on overdrafts can be up to 19.5%. (Source: Money Advice Service comparison tables January 2014.) Yet as long as you use an arranged overdraft and stay within the limit, it will be cheaper than using a payday loan. Don’t be tempted to slip into an unauthorised overdraft as this can be very expensive and lead to serious money problems.
To find out more read Overdrafts explained.
Borrowing from a credit union
A much more affordable alternative to a payday loan is a loan from a credit union. There’s a cap on the amount of interest they can charge – 3% a month or around 42.6% a year APR for England, Scotland and Wales 2% a month or around 26.8% APR for Northern Ireland – and no hidden charges or penalties if you repay the loan early.
An interest-free loan from the Social Fund
If you desperately need to borrow money and you’re claiming benefits, you may be able to apply for an interest-free Budgeting Loan from the Social Fund.
Help from your local welfare assistance scheme
If you’re struggling to pay for essentials like food, heating and clothes you may be able to get help from a local welfare assistance scheme. They vary from area to area and can provide, for example, vouchers, pre-payment cards, furniture or white goods and food banks. Some local authorities may also give loans.
- If you live in England, find your local welfare assistance team using this interactive map on the Children’s Society website
- If you live in Scotland, find out more about the Scottish Welfare Fund on the Scottish Government website
- If you live in Wales, find out about the Discretionary Assistance Fund for Wales
- If you live in Northern Ireland you may be eligible for a Crisis Loan. Find out more on the nidirect website