In an ideal world, we all have personal savings on which we can rely upon for financial emergencies or life’s bigger expenditures.
Unfortunately, reality does not always go to plan.
Emergencies often arrive at the worst times or cost so much money that our savings pots cannot cover the expenditure.
When we need money that we do not have available we normally need to borrow or take out credit.
In some cases, it can be wise to avoid a payday loan and instead, look for alternative sources.
Situations to avoid a payday loan
It is best to find alternatives to payday or short-term borrowing when:
You cannot see a repayment opportunity
It is important not to borrow money unless you can have a clear plan for repayment.
You need to know that you can meet the repayment deadline and pay all instalments when they are due.
You should only borrow an amount of money that you can comfortably afford to repay (short-term) or budget for, if you are looking at a longer-term commitment.
One of the benefits of a payday loan is that you are rarely required to think too far ahead.
You can borrow money for just a few weeks and should find it relatively easy to make a short-term financial plan.
If you need to borrow money this month, but already know that you will struggle to repay your loan when your next paycheck or salary payment arrives, then a payday loan is not the right solution.
Your circumstances might change
Unfortunately, we cannot always predict a change in circumstances, though there are some indicators to look out for.
Possible changes in circumstances that might affect your ability to repay your loan include:
- Suggestions that your job is not secure
- A potential relocation or house move
- A baby on the way
- Your rent or mortgage being due to increase
- Your car insurance, or other large insurance product, being due for renewal.
- An operation that may leave you unable to work for a while
A change in circumstances may leave you unable to repay your debt, or without spare cash that you thought you would have available.
The Competition & Markets Authority found, in 2015, that 17% of payday loan customers found it harder to make repayments than they had initially expected.
Before borrowing money, take the time to think about any upcoming changes that may affect your financial situation, so that you can avoid a payday loan.
The emergency is not really an emergency
If your car has broken down, is it essential that you get it repaired immediately?
If not (and you can wait for a few weeks), you might have money available to repair your car without having to pay any unnecessary interest.
Although payday loans are recommended only for emergencies, the Debt Advisory Centre found that only 44% of loans are used for genuine emergencies.
25% of people borrow money from a payday lender for a treat or a holiday.
12% used their loan to buy gifts for other people.
For luxury items and non-essentials consider borrowing money from a friend rather than taking out credit for your purchase.
If you absolutely have to book your holiday immediately, speak to friends or family first and see if they are happy to help you out.
If you only need a small amount of money, there will almost certainly be someone who can help.
Finally, ask yourself if that purchase is really essential. Whilst we all like to treat ourselves (and others) to nice things if you have to borrow money you do not have, is it really worth it?
And would the people you are buying for understand that you don’t have the funds available to make lavish gestures?
You should not apply for a short-term loan to fund:
Holidays or weekend getaways
Gifts (birthdays, Christmas, weddings)
Shopping trips, luxury spending and little treats for yourself
If a luxury item, such as a games console, breaks and needs replacing
Nights out and social events
A friend or relative can offer you the loan
It is sometimes preferable to borrow money from someone that you know and this type of loan can often be more flexible than it is to use a payday loan company.
When borrowing from a friend or family member you can often much more flexible payment terms, which means you may not necessarily need to begin repaying your debt immediately.
When borrowing from friends or family, you can usually arrange repayments that suit everybody fairly.
If you prefer to pay your loan back in small amounts (perhaps every other month rather than every month) this is an option that may be available.
However, there are some things you need to be aware of.
Borrowing money from friends and family can create friction if you do not stick to your side of the agreement.
You can easily damage a friendship or relationship if you do not meet your repayment obligations.
Only ever borrow money from people that you know personally if you are 100% certain that you can pay it back.
You want to borrow more than £1,000
When you apply for a payday loan, you will tend to find that you are offered a maximum loan value of £1,000.
Some lenders will not offer this much, preferring instead to work with smaller loan amounts.
If you require a larger amount of money, avoid a payday loan, as a traditional loan is usually more suitable.
You can apply for these with your bank, another high street bank, a challenger bank or a lender that offers larger loans.
May payday loan companies are moving into this space with lower APR products when compared to their payday offerings.
Do not be tempted to apply for multiple payday loans in order to access a larger amount of credit.
Applying for more than one payday loan can have a negative impact on your credit file.
You may also find it hard to keep up with repayments if you are managing multiple loans.
You are borrowing money to service existing debts
Warning bells should be ringing if you find yourself needing to borrow money to cover existing debt repayments.
If you are applying for a payday loan because you cannot afford your car finance repayment or minimum credit card payment, then this could indicate that you are in a debt spiral.
Debt spirals occur when you are paying one debt by borrowing money from somewhere else (robbing Peter to pay Paul), or when you are making repayments on one debt but missing them on another.
You may also be in a debt spiral if your total interest and charges are adding up to more than you are managing to repay each month.
Once you are in a debt spiral, it is extremely difficult to pay off your debts. Look out for the warning signs.
Do not apply for more credit if you think that this is happening.
You have access to cheaper forms of credit
Payday loans are high cost, short-term debts.
The high interest rates reflect the higher level of risk that payday lenders are willing to take on board.
You may be able to get a payday loan when other forms of credit are not available to you.
Other forms of credit, if you can access them, may be significantly cheaper. You will pay less interest by borrowing using a credit card, for example.
If you can make use of cheaper credit options then it may be in your interest to do so.
Watch out! Whilst payday loans come with strict limits, imposed by the Financial Conduct Authority, many other forms of borrowing are much more relaxed.
If you are not particularly disciplined and if you may be tempted to use funds just because they are available, then a restricting payday loan may be a far more responsible choice.
Don’t forget that some forms of borrowing are more expensive than you might think.
Some arranged overdrafts will actually cost more over 30 days than a payday loan, and as they are not limited it is easy to get further into debt without realising.
Unauthorised overdrafts are almost certainly going to be more expensive than a payday loan.
Always consider all of your options before borrowing money.
Making an educated decision will help to protect you from financial difficulty.