Alternatives to Taking Out a Payday Loan

If you urgently need a financial boost to tide you over, payday loans can start to look tempting. However, with their extremely high interest rates they can quickly become a problem debt. Many people who take out payday loans as a short term measure find they have trouble paying them off. When this happens, interest rates of over 1000% APR (or equivalent in fees) can have plenty of time to bite.

If you are in a difficult situation but want to avoid payday loan debt, there are a number of lower-cost alternatives you might wish to consider.

A Word of Caution

You should think carefully about any sort of credit, and consider all your options before taking on debt. Make sure you know how you are going to pay back, and are confident you will be able to do so. However, as long as you properly consider your situation, these alternatives can prove far more manageable than payday loans.

Bank Overdrafts

If you speak to your bank, they may be able to arrange an overdraft on your account to help tide you over. Banks vary quite widely in how they manage overdrafts, but interest rates should certainly be much lower than on a payday loan. Some bank accounts come with attractive overdraft rates or even a small interest-free “buffer” as perks to attract customers.

Credit Cards

If you have a credit card, you may be able to obtain a temporary increase on your card’s limit if you talk to your credit provider. However, this is definitely an option for those who already know how they will be able to promptly pay back the debt. While credit cards are more affordable than payday loans, they can still be expensive and problematic if debt is allowed to linger. Nonetheless, if you know that you will be able to repay the full amount on time, this is usually decidedly preferable to payday lending.

Credit Unions

Credit Unions have been in the news for a while, with prominent figures who are critical of payday loans touting them as an alternative. These are community-based non-profits, giving members access to loans as well as to current and savings accounts. Loans from a credit union tend to be both more accessible than a bank and more affordable than a payday loan.

Budgeting Loans

This type of lending can be a huge help to those who find themselves in a very tight spot indeed. If you have been claiming working age benefits for 26 weeks or more and are lacking money for essentials, then you might be eligible for a budgeting loan. This is designed to cover the cost of things like rent, food, clothes and furniture. It is interest free, paid directly to your bank account, and will usually have a repayment period of two years.

Reasons for a Bad Credit Rating

A bad credit rating can make it harder to take out loans and credit cards. They may mean you cannot take out new sources of credit, or end up with high rates on credit cards and mortgages.

If you have found yourself turned down for credit or been offered higher than expected rates, this is a sign you may have a bad credit rating. There are several things that might cause it, and if any of them apply to you it may be worth taking action to improve your score.

Missed Payments

Missing loan repayments or being late to make them is a key factor in getting a bad credit rating. This doesn’t just apply to loans and credit cards either. Missed or late payments for utility bills can also feature on your credit rating. If you have failed to pay back credit according to the agreement, this will make lenders wary of trusting you with money in the future and hit your credit score.

Even if you are meeting repayments, this does not guarantee your credit score will be left untouched. For example, if you are only managing to make the minimum levels of repayment on a credit card, it might have an effect on your credit score. This is because it could lead lenders to suspect you may be having trouble paying debts back.

Lack of Credit History

Some people think that if they have rarely or never taken out any form of credit in the past, this will give them a good credit score because they have no problems against their name. In fact, this is often not true. If you have no credit history or a very short one, you are an unknown quantity in the eyes of lenders. They cannot judge how reliable you are at making repayments because they have no past information to go on.

Unfortunately, good behaviour doesn’t always mean a good credit rating even if you have taken out debts in the past. If you have a history of taking out small debts such as credit cards and then paying them off on time, this might mean lenders still feel some uncertainty about how you would handle bigger debts. Though it may seem unfair, this may also lead them to see you as an unprofitable customer, as you do not accrue interest on debts.

Bankruptcy and Court Judgements

Another important factor that can hit your credit rating is the kind of financial issue that leaves an official record. If you have ever been bankrupt, this will have a very definite impact on your credit score. The same applies if you have ever entered into an Individual Voluntary Agreement. If a County Court Judgement has been made against you stating that you owe money, once again this will leave a black mark on your credit rating.

Stemming the Rise of Debt

Being in debt is not shameful. Most people experience being in debt at least once in their lives. However, while debt may not be shameful it can become deeply unpleasant. Sometimes the need to meet repayments will lead to building up more debt elsewhere in order to afford the cost of getting by.

If you are in a difficult financial situation and your debts keep going up, there are several things you can do to try and stem the increase.

Don’t Use Credit Cards for Cash Withdrawals

You need money to get by, and if you don’t have enough in the bank it can be tempting to use credit cards to withdraw cash. In fact, this can even look like a necessity. However, using credit cards for cash withdrawals should be avoided. Instead, you should just make the purchases directly with the card whenever possible. This will usually result in a better rate of interest than cash withdrawals.

Talk to Your Bank

Exceeding your overdraft limit, will usually lead to being hit with higher interest rates and additional charges. If you find yourself regularly needing to go over your limit, then try talking to your bank. Many major banks may be willing to increase your overdraft limit, which can avert these added costs and reduce the added burden it places on your debts.

Rearrange Your Debts

Borrowing from one place to pay off another is certainly not always a good idea, but there are times when it makes sense. For example, if you have built up debt on a credit card with a poor interest rate, it may be worth trying to obtain one that offers a better rate. This could help you clear the higher-interest debt on your existing card, as well as making future purchases at the improved rate. However, if you are struggling to meet debt repayments and are tempted to borrow from a higher-interest source, be extremely wary. This will almost always just make things worse further down the line.

Keep Stock of What you Owe

Some people try to wilfully ignore the exact amount they owe, because it is an unpleasant fact they do not want to confront. However, ultimately it is best to know how much you owe, to whom you owe it, and what the interest rates are. This will help you to get a better grasp on your situation, and focus your efforts on paying back higher-interest debts first.