What is a payday loan, and what are my options?

September 24, 2019 Icon 8 mins read
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Payday loans are short term loans with high-interest rates. They tend to be used to bridge the gap to payday and are negatively viewed by future lenders.



Alternatives to Payday Loans are:

  • Family and friends: The initial conversation might be awkward, but they’ll want to help in any way they can. Make sure you discuss when you will pay them back.
  • Personal loans: You may need to borrow more money over more time, but this is a great alternative. You can search with Credibble here.
  • Credit Cards: You can get promotional interest rates as low as 0%!
  • Speak to your employer: See if you can get an advance on your salary.
  • Credit Unions: These not-for-profit organisations can offer you lower interest rate loans.
  • Overdraft: Consider using an authorised overdraft. If you don’t have one, contact your bank to see if they will offer you one.

Payday loans are, as the name suggests, loans which you tend to take out to bridge the gap to payday. They tend to be for lower amounts over a short period and have very high-interest rates. You may decide to take a payday loan out if an unexpected cost arises, such as your boiler breaking or the car breaking down.

Payday loans haven’t had the best press – in 2017, new regulations came into force, and a cap was put in place in 2015 of 100% of the loan amount: this means that you will never have to pay more than double the amount you borrowed in the first place. Payday lending remains the most expensive form of borrowing.

It’s a good idea to be aware of your options when it comes to borrowing money in the short term. There are plenty of different alternatives that won’t cost you nearly as much and will have a better impact on your credit report.

Why avoid payday loans?

  • The rates of interest applied to payday loans can be staggering, especially if you need to extend the borrowing time.
    • In July 2019, the typical interest rate for a payday loan was 1300% annually. No, I did not accidentally add a zero.
  • Your affordability is often not checked prior to approval – this means you may struggle to pay it back. You can end up trapped, paying more and more in fees each month, and never managing to repay the loan.
    • One in four payday loans are rolled over for another month. That’s a quarter of people unable to pay their loan back at the end of the month.
  • Your credit report won’t thank you. Other than going bankrupt, payday loans have the most negative impact on your credit report. This means that any hard work you have done in getting your creditworthiness as high as you can will be for nothing, destroyed by a payday loan.
    • This is because lenders will see that you’ve struggled with money, even if you paid it back on time – it’s not having this on your credit report at all if alternatives are available.
  • You don’t get very long to pay the money back
    • The main issue here is the fees and extra costs that will hit if you don’t pay the money back in the tight window that you have. You may end up with a lot more debt than you initially took out.

What are my alternatives?

The good news is, there are plenty of other means of borrowing that you can consider. This isn’t a definitive list of options, and some may be more suited to you than others.

Family and friends

It’s difficult to admit to your family or friends that you’re struggling financially. A study has shown that people are more likely to share their favourite sex position with a stranger than their bank balance, so you’re not alone here. But, imagine the tables were turned, you’d want to help a friend or family member instead of letting them use a payday lender, wouldn’t you? Sometimes, you just need to swallow your pride and make that phone call.

Things to consider:

  • Make sure you discuss when you’ll pay the money back before they lend it to you, to reduce the risk of ruining a relationship.
  • Check that the person you’re asking isn’t struggling themselves. Sometimes people can be happy to lend out money, but in the background, they’re worried about their financial situation too.

The benefits of this are the lack of interest, more leniency with time to pay back, and nothing is reported to credit bureaus. You can sort out payment terms on an informal basis and say thank you with a takeaway or a round of drinks next time you’re out.

Personal Loans

Taking a personal loan instead of a payday loan may require you to have good creditworthiness, but it can save you a lot of money. You may get a better rate by borrowing more money over a longer period of time than you would have done with a payday loan. Take a look at our article on getting the best rate on a personal loan here.

Things to consider:

  • You are taking out a loan, so ensure that you make all your payments on time.
  • Make sure you can afford the payments each month – go through your income and outgoings to ensure you won’t fall into any trouble down the line.

The main benefit of a personal loan over a payday loan is the cost, however, it will also do wonders to your credit report, if managed correctly. If you don’t already have a personal loan, you’ll be adding to your credit mix. Make payments on time every month and you can strengthen your payment history.

If you think this might be an option for you, you can sign up for Credibble and see your personalised loan offers. These are reflective of your creditworthiness, using a soft search.

Credit Card

Credit cards can be a much safer method of borrowing money in the short term. There are plenty of different types of cards to suit your needs, such as purchase cards, balance transfer cards, and money transfer cards. Which one you get will depend on what you will need the money for, you’ll find more on this in our article: Do I need a loan or CC?

Things to consider:

  • Credit cards can be fantastic if managed correctly, try not to use your credit card on a whim for things you don’t need and can’t afford.
  • Make sure you make at least the minimum payment every month – even if you have a 0% rate!

You can get significantly better interest rates with a credit card as well, some even have a promotional period of 0%, so you would save a great deal of money. Having a credit card and using it sensibly will have the extra bonus of increasing your creditworthiness, especially if it is paid off in full every month.

Speak to your employer

Financial worries can have a huge hit on your productivity and work ethic, most employers will help you work out a solution. You may be able to get an advance on your salary.

Credit Unions

Credit unions are not-for-profit institutions that can lend you money with much lower rates of interest. You may need to become a member of one first – have a look online to see if a Credit Union can help you.

Things to consider:

  • As with Personal Loans, you are taking out a loan, so ensure that you make all your payments on time.
  • Make sure you can afford the payments each month – go through your income and outgoings to ensure you won’t fall into any trouble down the line.

Use your overdraft

If you have an overdraft, this is exactly the type of reason why you may need to use it. Check if there are any costs to use an authorised overdraft first. If you don’t have one, then don’t enter an authorised overdraft – this will probably come with fines or fees. Contact your bank to see if they will authorise one for you.

Things to consider:

  • Your bank may have an automated text message for when you’re close to, or in, your overdraft – it’s good to turn this on to make sure you stay in the black!
  • Even an authorised overdraft can have fees to use it, take these into consideration!
  • Overdraft usage will affect your creditworthiness in a negative way, but only if you use it consistently, and far less than a payday loan will. Having an overdraft and not using it, however, can positively impact your report. Using your overdraft instead of taking out a payday loan will relieve a lot of pressure on you and cost you less money.

In Conclusion

We all suffer from financial trouble at different points in our lives, whether it’s a one-off everything-broke-this-week or several years of low income. There are plenty of alternatives to taking out a payday loan, letting your creditworthiness and bank balance thrive.

If you are struggling and need help, consider speaking to one of the below. Alternatively, you can call your bank and ask them to assist you:

Citizens Advice: https://www.citizensadvice.org.uk/

Step Change: https://www.stepchange.org/

National Debt Line: https://www.nationaldebtline.org/

About the author
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Zoe Stabler

Zoe is a cat owner, ice skater and Christmas enthusiast living in London.

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