Looking for advice on how to avoid a payday loan? Even if money is tight, there are plenty of ways that you can avoid high-cost credit and still get by comfortably. But how?
There are positive changes you can make to your lifestyle and your approach to money. You can avoid short-term loans by making better decisions on how to manage the cash you have spare when all the bills are paid.
There are even ways that you can increase the amount of financial freedom you have without needing a pay rise from the boss.
In this article, our researchers have examined the very best ways on how to avoid a payday loan.
Tip 1: Monthly budget to live within your means
Your first step should be to put together a monthly budget to live within your means.
When you are careful with money, you can make it go a lot further and you might even be able to put money aside for emergencies meaning you never have to seek out a short-term loan online.
Loans for people with bad credit profiles might feel like a temporary fix but remember that you have to pay it back with interest.
If you take out a loan, you will have the money when you need it but you will have less in the long run.
How do you create a monthly budget to live within your means? There is a great online budget planner on the Money Advice website – click here to visit it. If you’ve not got time for that now, we have prepared one for you.
On the top of a spreadsheet or on a piece of paper, write down “My Monthly Budget”.
Log into your online banking and then write down all the sources of money coming into your home – salary, freelance work, second job, rental income, student loan, bursary, tax credits, and benefits. Add them all together to calculate your monthly income.
Now, create a separate “Expenses” column.
List all of your household bills and how much they cost you, including your rent or mortgage payment, how much you put aside for savings or other investments, how much you pay back on loans or credit cards, your shopping bills, petrol/bus money, television subscription, gym membership, insurance payments, and more.
You should include every bill you see coming out regularly on your online banking.
Add up all your expenses and take it away from your income. The money you are left with is something called “discretionary budget” – that is your spare cash to spend on clothes, socializing, holidays, and more.
Tip 2. Avoid impulse purchases
The amount you can save when you avoid impulse purchases surprises many people.
The coffee you get from Costa every morning before you go into work may cost you £1,000 a year. Grabbing lunch from the nearby local supermarket every day might cost you another £1,000 a year.
By making your own coffee and your own lunch, you could half these bills over the year – sometimes, you will even save more.
To avoid impulse purchase, make a 30-day list. Your 30-day list will contain treat items that you can buy using your discretionary budget. Keep the list on your phone and check it regularly.
If you absolutely have to have something on your list and it will not put you in any financial difficulty, buy it. However, if you hold off a few days and keep revisiting your list, you might decide that you do not need that dress or that new tablet after all. If that is the case, then you should cross it off your list.
It is not always possible or desirable to avoid impulse purchases when you really want something.
Alternatively, use TopCashback to see if you can get paid for buying the item you want or a site like MyVoucherCode to see if there are any discount codes for the shop you want to buy your treat item from.
On the subject of sales, it is difficult to avoid impulse purchases if you hear that there is a store or a website that you like and trust which is or will be offering big discounts.
Your treat item in a month might be to spend £50 at their sales event. However, if it is not in your treat list that month, you might be best to avoid seeing what’s available at the sale because the retailers know how to put pressure on you to buy now before you have had the chance to consider whether you really want it or not.
Tip 3. Spending less on holidays and at Christmas
Spending on holidays and at Christmas is something that many people find very hard to avoid going overboard with. Did you know that, according to the Independent newspaper, the average family spend per household on Christmas is £821?
Did you know that, according to TravelMole, the average British family spends £1,284.54 per person on their summer holiday?
Spending on holidays and at Christmas is important but it is equally important to make sure that your spending does not run away with you.
If you finance spending on holidays and at Christmas through a mixture of your wages, credit cards, overdrafts, and loans, then try to make sure you start repaying any debt you have accumulated as soon as possible.
That way, you will cut down a lot of spending on interest on the debt through the year meaning more money for you and your family.
Look for cheaper holiday deals and try to do your Christmas shopping a few months advance to cut down on your annual expenditure on both.
Tip 4. Use comparison sites to spend less
One great way of cutting down on the amount you spend is to use comparison sites. You just enter your personal details and, when you use comparison sites, you will get the best deals available to you on:
- Television subscriptions
- Holidays and flights
Many companies spend all their time, money, and energy on getting new customers to sign up with them rather than rewarding the loyalty of existing customers.
Money Mail discovered that loyal customers pay £270 more on gas and electricity bills than new customers do – read the report here.
Tip 5. Set financial goals
Every New Year, many British consumers set financial goals for themselves. If you set financial goals for yourself, it is equivalent to having a monthly budget plan but on a much bigger scale.
When they set financial goals, many people target either the reduction or the elimination of debt as their target for the next 12 months.
Every time you make a repayment or even an overpayment, your credit score will improve meaning that, the next time you need finance, you will get more companies offering money to you over longer periods of time at better interest rates.
When you set financial goals for yourself, you might choose to get rid of your overdraft or pay off your credit cards.
Remember that with every time you pay debt down or off, your discretionary budget goes up because you are paying less in interest.
It might be the case that, because of the amount of debt you currently have, paying it all off is unrealistic this year. Paying off debt is always better, according to Martyn Lewis, the MoneySavingExpert.
You may not be able to clear off your debt this year but what you do this year may mean that it is possible the next year.
Why is it better to avoid a short-term loan?
There are many reasons why it is better to avoid a short-term loan. If you need to take one out, you may not have any money left in your current account and no savings you can use to cover a temporary cash shortfall.
Taking out online loans, particularly a loan until payday, is a route taken by people who often have poor credit reports who have been turned down for finance elsewhere.
Our team have written an article about how to improve your credit score – click here to read it.
One of the main reasons why it is better to avoid a short-term loan is because of the higher interest rates charged on them.
These higher interest rates make it harder for people to pay them back, putting them at a higher risk of default.
If you do not repay a personal loan for “bad credit” borrowers on time, you may end up paying more in interest and, worse, your credit score will deteriorate further.
Perhaps the biggest reason why it is better to avoid a short-term loan is that it suggests that a borrower has to rely on credit just to get by.
If that is the case, then it is a worrying sign that a borrower’s debt might be spiralling out of control and that they may be using one form of finance to pay back the interest on another.
Reasons when you should avoid taking out short-term credit
There are many reasons you should avoid taking out short-term credit.
It is an expensive form of finance and, compared to other types of personal loan, bad credit loans do not allow you to borrow a large amount of money and you have to pay the loan back quickly together with the interest.
Instant cash loans you take out online should only be used for emergencies that you cannot predict or bills that are too big so that they cannot be fully covered by what is left in your discretionary budget.
If you receive a really big bill and you can afford to pay for some of it from your discretionary budget, put that to use so that you don’t have to take out a bigger instant loan online than you need.
Our researchers have compiled this list of the seven main reasons you should avoid taking out short-term credit:
You believe your circumstances may change
If you believe your circumstance may change in the near future and that those changes will make meeting all of your repayments very difficult, then you should not consider instant cash loans as a solution.
Examples of your circumstances changing include a baby on the way, moving home, an increase in your rent or your mortgage, an operation, or your insurance is due for renewal
If any of these types of events may happen to you and they affect your ability to pay your lender back on the agreed dates and for the agreed amounts, please do not take out a payday loan or a short-term loan.
Is it really a financial emergency?
When your car or washing machine breaks down, is it really a financial emergency?
Payday loan and short term loan lenders are specifically set up to help people in emergencies access cash they need when other financial institutions may not be able to offer a loan.
Could you wait a few weeks to save up to pay for this emergency?
When the Debt Advisory Centre questioned payday loan customers, only 44% of them were taken out to cover emergency situations. A quarter of them were for a treat or a holiday.
One in eight were used to buy gifts and presents for loved ones.
How would the person for whom you bought a present feel if they knew that you used a payday loan to fund the purchase?
Short-term loans are not there to pay for holidays, weekend getaways, shopping expeditions, luxury items, little treats, gifts, games consoles (and the cost of repairing them), social events of nights out.
If you are thinking about taking out a loan for any of these reasons, why not approach friends or family first?
A friend or relative can lend you money
On that subject, whether for a financial emergency or for some other reason, what if a friend or relative can lend you money instead?
If a friend of relative can lend you money, that is nearly always better than taking out a payday or a short-term loan.
A friend or a relative will not charge you interest and they will not take you to court if you miss a repayment.
You will find that, if a friend or relative can lend you money, they will often be much more flexible over the repayments than a lender.
Make sure that if you fall into difficulty paying your friend or relative back that you keep them informed.
Many friendships and close family relationships suffer when there is a dispute about money and it is not worth falling out with someone you love over a few hundred pounds.
You want to borrow more than £1,000
If you want to borrow more than £1,000, you may have trouble in finding a payday loan or short-term loan provider which will lend you this much money.
Some prefer to lend in much smaller amounts and others would only consider lending £1,000 to a customer who has taken out loans with them previously and made each repayment on time and in full.
You may consider the possibility of taking out loans from multiple payday loan or short-term loan companies to take the total amount you borrow up to £1,000.
We would not advise that as juggling the repayments may become difficult if you have to make multiple repayments during the course of a month to different lenders.
A few payday loans and short-term loan lenders are starting to offer loans of more than £1,000 but it is still a minority.
If you need to borrow £1,000 or more, you should think about approaching a bank or building society (particularly the one you use), a peer-to-peer lender (like Zopa), or a challenger bank. Please be aware however that many of these lenders will only work with borrowers with high credit scores.
You are borrowing money to service existing debts
If you are borrowing money to service existing debts, this is a warning sign that you are about to enter a debt spiral.
A debt spiral is a situation where, no matter how hard you work or how well you keep to a monthly budget, you are unable to pay off the debt you currently have and you find that the amount of debt you owe overall increases over time.
One sign that you are borrowing money to service existing debts is to take out a payday loan or short-term loan to pay off the interest on something like a car loan, overdraft, or credit card bill.
If you think this is happening to you, please contact one of the following debt charities without delay and explain your situation to them:
You have access to cheaper forms of credit
Online short-term high-interest loans are not the right product for you if you have access to cheaper sources of credit.
Many people who do have access to cheaper forms of credit use the more expensive alternatives because they’re easy to apply for, acceptance rates can be high with certain lenders, and the money often lands in your bank account straight away.
If you have access to cheaper forms of credit like credit cards or overdrafts, you should use those first. However, please be careful because:
- It can take years to pay off a credit card if you only make the minimum monthly repayment
- If you go into unauthorised overdraft, you may end up paying your bank or building a lot more than you intended
Try to compare all the options open to you if you want access to cash straight away and you have access to cheaper forms of credit than payday loans and short-term loans.
Avoiding payday loans: Summary
Where possible, avoid payday loans.
Instead, focus on making the most of the money you earn each month with monthly budgeting and shopping around for best deals.
A few simple changes to your life and your attitude to money could mean you have more to spend on the things you want in life (like holidays and at Christmas) without the need to take out any finance whatsoever