Alternatives to payday loans

Alternatives to payday loans
February 23, 2016 Cash Lady

An emergency need for cash can pop up at any time. It tends to rear its ugly head when its least expected. The average person has a set lifestyle which tends to mirror their usual income and there is usually very little slack left at the end of the month. This means dealing with unexpected bills or expenses can be tricky, even if you have what others would consider a healthy income.

Credit Cards

If used properly, credit cards are a great way to bridge the gap when you find yourself short occasionally.

There are various types of credit cards in the market that may help you get the money you need.

Ideally, if you can get a 0% Money Transfer card, you may be able to borrow the money for only a small handling fee. A Money Transfer card allows you to transfer a balance from a credit card to your current account, essentially turning credit into cash. If you are lucky enough to get one of these deals, it’s a great way to raise some extra cash.

0% Purchase cards are more prevalent on the market, but you are restricted if you need cash. (I.e. To pay a builder who won’t accept credit cards). There may be a trick to get around this issue. You could potentially use this credit card to pay for something that you would otherwise pay cash in. This could potentially free up some cash for your unexpected expense while hedging the usual expense onto the credit card.

But most 0% offers are usually reserved for those who possess a reasonable credit rating. So if your credit rating isn’t up to scratch, this probably isn’t an option for you.

On the other hand, even if you can’t get a 0% card, a normal credit card could still be a cheaper alternative to a pay day loan. But it requires you to remain disciplined to clear the balance as soon as possible.

The last option is the high interest credit cards targeted at sub-prime customers and marketed as credit building credit cards. These will usually have high interest rates (typically APR 35% upwards). But if you are able to repay the balance reasonably quickly, you may be able to avoid paying a high interest amount or even none at all.

As with most borrowings, credit cards can get out of hand. If you are looking for a small amount in the short term, it is essential to get it paid off as soon as possible. If you stick to paying the minimum amount every month, the interest free period will expire soon and you’ll be stuck in an endless spiral of just barely paying the interest on the car without affecting the capital sufficiently.

Credit Cards Pros and Cons

Pros

  • Can offer lower interest borrowings.
  • Flexible repayment options.

Cons

  • Hard to obtain flexibility.
  • Can land borrowers in financial trouble.

young man hands holding credit card and using phone

Bank Loans

Bank Loans or equivalent financial institution loans are often a lower interest alternative to payday loans. Bank loans are a bit more accessible these days due to the boom of internet banking and comparison websites. This means you don’t have to go into a bank and convince your bank manager to lend you money as you would have done in the olden days. But don’t confuse this with thinking Bank loans are easier to get. They are not. Most financial institutes carry out stringent affordability checks and obtaining one is usually reserved for ones with good credit records and reasonable incomes. This is more so the case post credit crunch, where banks and financial institutes had to tighten their processes.

Bank Loans Pros and Cons

Pros

  • Can be lower interest.
  • Fixed and upfront repayment plan.

Cons

  • Harder to obtain.
  • Little flexibility in repayment.

Bank Overdrafts

If you don’t want to get a bank loan, a bank overdraft maybe a good option for you. Overdrafts differ from loans in a way that they are linked to your account and acts as a buffer when you run out of money. If you’ve maintained your account well, you may find it easier to be accepted for an overdraft rather than a bank loan.

It is important that you recover from the spiral of dipping into your overdraft though. If you get into the habit of dipping into your overdraft every month, it can get difficult to get back into surviving with your own money again. The advice would be to only dip into your overdraft in an emergency and as soon as you can, ensure your account gets back to being sufficient on your money alone.

Bank Overdrafts Pros and Cons

Pros

  • Can get small amounts.
  • Could be relatively easier to be accepted.

Cons

  • Can make you reliant for your monthly expenses.
  • f you spend too much time in the ‘red’, getting out of it can be difficult.

Credit Unions

Credit Unions are usually set up to service a community whether it is a geographical one, or a common lifestyle or profession. They are usually there to help members of the community who may not be able to afford or be accepted through a high street bank or a similar institution. Another advantage of credit unions is that they may lend smaller amounts (£50-300) as opposed to banks who may only lend larger amounts.

The down side is, unless you are already a member of a credit union and have some savings with them, this is unlikely to help you in the short term.

But you find you are in this situation often enough, maybe it’s a wise move to join a Credit Union you qualify for and start saving with them.

Credit Unions Pros and Cons

Pros

  • Can borrow smaller amount.
  • May lend to you even if High street lenders do not.
  • Can be cheaper interest rates.

Cons

  • Might need to be an existing member and have some savings with the Union.

Borrowing from Family/Friends

This is the most awkward option out of the lot, yet may be the most cost effective as often this will be an interest free loan.

But if you are brave enough and fortunate enough to have family or friends willing or able to help, it’s a great option. You will pay little or no fees, and you may be able to agree a repayment plan that suits you.

Borrowing from Friends/Family Pros and Cons

Pros

  • Inexpensive option.
  • Can agree a repayment plan to suit both parties.

Cons

  • Can lead to potential friction in personal relationships.

In essence your borrowing options depend entirely on your personal circumstances. Some of the above options may be not for everyone or may even be out of reach. But the bottom line is, there are plenty of options to consider when you need to borrow money. Picking the most suitable option could save you a lot of money and potentially a few headaches.