Finding the cash to pay for emergency or unforeseen expenses can be tricky. We are told to put aside money every month for a ‘rainy day’ but in reality, this is very difficult for those who are on a tight budget.
As a result, it is often tough to fund things, such as car or house repairs, that don’t come under our normal day-to-day budget.
CashLady takes a look at the small loans alternatives to pay for those unexpected bills…
Small loans alternatives: Credit Unions
What is a credit union?
In essence, a credit union is a not-for-profit alternative to a bank.
These are not exactly small loans alternatives, (they actually offer small loans) but we have included it here as it is a different type of loan, typically offered by a high street bank or payday lender.
Credit unions are usually set up for a particular community or profession. They are a type of co-operative (a business that is owned by its members) that you can borrow money from. Many also offer savings and current accounts to their members.
One of the advantages of a credit union, as opposed to a bank, is that they tend to offer small loans at lower rates of interest. Credit unions may also be more likely to lend to people that a high street bank would not, because they may take a more personal approach to evaluating your finances for a loan.
In order to borrow money from a credit union, you must be a member. If you are interested in becoming a member of a particular credit union, you should check the eligibility criteria of the union you want to join.
This means that unless you are already a member of a credit union, it may be hard to get the emergency cash you need very quickly.
However, payday loans are only meant for emergency situations. If you find yourself regularly needing to apply for a payday loan, it may be a good idea to look into joining a credit union and beginning to save with them.
Credit unions are authorised and regulated by the Financial Conduct Authority.
Small loans alternatives: Credit cards
If used properly and paid off in full every month, a credit card can be another way to fund emergency expenses.
There are many different credit cards available in the UK. Deals change all the time, so it is worth looking at credit cards comparison websites, such as uSwitch or Totally Money
If you are thinking of applying for a credit card, you can also use these websites to check your eligibility for a specific card(s). Doing so could improve your chances of being accepted, as you could apply for a card that you have the best chance of being approved for.
Some credit cards offer 0% on purchases for a specific period of time. You could use this to pay for emergency expenses. In order to keep your 0% interest deal, you must remember to pay off the minimum amount every month. If possible, you should try to clear your balance in before the deal ends, so that you do not incur any interest.
Be aware that some credit card companies charge a fee for their services, such as annual subscription charges or balance transfers fees.
There are also 0% money transfer cards available, where you can move money from one credit card to another. Alternatively, you could move cash from your credit card to your bank account, effectively giving you a 0% cash loan. These cards involve a small handling fee.
0% deals are often only available to those who have a good credit rating.
If you cannot get a 0% credit card, a normal credit card could still be used to pay for expenses, as long as you pay it off in full every month. Otherwise, you could end up paying interest.
Just like other forms of borrowing, credit card spending can get out of hand if not properly managed.
If you do not pay off the balance in full every month, you could end up paying interest. Should you only pay off the minimum amount on a 0% credit card, you could find yourself struggling to meet the repayments once the deal ends.
Additionally, it is worth bearing in mind that the credit card industry does not have the same price caps as the High-Cost Short Term Credit sector, which means that your repayments may not be capped.
Bank overdrafts as small loans alternatives
If you do not want to take out a small loan, a bank overdraft could be another alternative to manage unforeseen costs.
Those who have managed their bank account well may be more likely to get an overdraft than a bank loan.
One of the main advantages of bank overdrafts, as opposed to bank loans, is that you can borrow smaller amounts when you need to.
It is important that you do not get into the habit of constantly living in overdraft debt. Relying on your overdraft for normal monthly expenses is not recommended.
As with small loans, an overdraft should only be used for emergency expenses and should be paid off as quickly as possible.
Borrowing from family and friends can be a small loan alternative
It can be tempting to borrow from friends and family members. Often, people who know you may not charge you any interest or fees, making this one of the most cost-effective options available.
Additionally, for those who are lucky enough to have family members to help, you can come to an agreement about a repayment plan that could suit all parties.
Unfortunately, borrowing money from family or friends can put a great deal of stress and strain on your relationship with them. Moreso if you don’t pay or if you borrow regularly, they could be, in effect, acting as a revolving line of credit.
Although this can be an inexpensive option, things can become fraught and relationships could ultimately suffer.
Small loan alternatives: summary
There are various different options available to those looking to fund emergency expenses, other than taking out a small loan.
It is important to carefully consider which would be the best option for you. Not all small loan alternatives are available to everybody. For example, not everyone will be able to take out a credit card.
Considerations such as how fast you need the cash, whether you have a good credit rating and if you have any friends or family who are willing to lend you the money, will need to be thought through properly before making a decision.