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What are Some of the Best Alternatives to Payday Loans?

What are Some of the Best Alternatives to Payday Loans?

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Down the years, many of us who have found ourselves in a challenging financial situation, or even just wanted a quick boost of cash for something desirable, but inessential (such as a holiday or home improvement work), have considered a payday loan

How much would you like to borrow?
£ 500

As the term “payday loan” suggests, this type of loan is designed to be a short-term way of borrowing money, that then needs to be paid back on the borrower’s payday. 

In effect, a payday loan tides the borrower over financially until they are next paid by their employer. This helps to explain why many people have turned to them – or at least considered them – when they have found themselves with an unexpected and sudden expense to deal with. 

You know the kinds of expenses we’re talking about… maybe a medical expense, or veterinary fees, or even needing to have your car repaired at short notice for an unanticipated problem, so that you can commute to work. 

But there’s a bit (well, a lot) of a problem with payday loans…

 

But there’s a bit (well, a lot) of a problem with payday loans

 

How can we put this? Payday loans have come to have a bit of an “image problem” over the years, and it’s sadly not an entirely undeserved image problem. 

The fact is, yes, in today’s online world where so much is so accessible straight away, payday loans can be extremely easy and quick to request and obtain. 

BNPL schemes have gained in popularity in recent years amid the cost-of-living crisis. They normally work on the basis of someone buying an item online, and agreeing to pay part of the cost immediately, with the rest being paid in two or three further manageable instalments over a period of weeks. 

You might see the BNPL option being offered on certain retailer websites at the checkout stage of a purchase. The repayments are usually interest-free, but you are likely to be hit with fees if you miss a payment. 

So, you will need to carefully consider whether the specific terms set out by the provider you are looking at would be right for you – and indeed, the same can be said for the suitability of a BNPL arrangement in general. 

Taking out a short-term loan with the help of a credit broker

 

Taking out a short-term loan with the help of a credit broker

 

Over the last few years, you might have come across mentions of “short-term loans” online, rather than necessarily payday loans. And this is an important distinction to make, as they are not exactly the same thing. 

Technically speaking, a payday loan can be considered a type of short-term loan, given that the latter term is a blanket term referring to any loan with a duration of less than 12 months. By contrast, a payday loan is typically borrowed for just one month or an even shorter time than that. 

This difference between the two is a key one, with online credit brokers that specialise in short-term loans – such as ourselves here at CashCompare – scouring the broader market to help people find a loan product that works for their circumstances and needs. 

Of course, if you’re looking for something that will simply make all your financial problems go away, short term loans are not a miracle solution that will accomplish this for you. Even a short-term loan that is exceedingly well-matched to your needs will still have to be paid back, in accordance with whatever agreement you reach with your lender. 

Still, they are one more solution that could be worthy of your consideration if you do find yourself with short-term financial worries. 

But this can come with serious downsides. These include such loans’ horrendously high short-term costs – potentially amounting to as much as 1,500% APR – and the fact that the penalties associated with them could rapidly put the borrower in a cycle of debt if they miss a repayment. 

In an ideal world, then, you probably wouldn’t ever take out a payday loan at all. But of course, you probably already agree with that. 

So, what other short term loans or finance options are out there, that could make more sense for you than a payday loan? Below, we have set out some of those possibilities. 

Borrowing from family and friends

 

Borrowing from family and friends

 

Yes, we realise it can be intimidating and awkward to try to approach a family member or friend for help with anything financial. However, someone who is close to you is likely to be empathetic to your financial worries, and borrowing from them could be a much cheaper solution in the grand scheme of things than a payday loan. 

You will, however, need to communicate clearly to each other, including in relation to what will happen if you are unable to repay the relative or friend at the agreed time. You won’t want to risk causing damage to a treasured and appreciated relationship because of any misunderstandings.

Applying for an arranged bank overdraft

 

Applying for an arranged bank overdraft

 

Whether, at the time of reading this, you already have an overdraft on your bank account, or you don’t have one at all, it could be well worth talking to your bank about whether they could give you an arranged overdraft or extend your existing one. 

Although interest rates on bank overdrafts can still be as high as 40% APR, this is a lot cheaper than the aforementioned extreme level that the APR on a payday loan can reach. 

Taking advantage of a ‘buy now, pay later’ (BNPL) scheme