What Are The Alternatives To Payday Loans?

With payday loans known for carrying high interest rates that often exceed 1,000%, it is important to know what alternatives are available if you are looking to borrow £200, £300 or £500 for an emergency.

Whilst payday loans are popular for 2 million Britons each year and the promise of online fast funds in 15 minutes is very attractive, borrowers should always take their time to look at what alternatives are available and how they can save money on the interest and overall cost of the loan.

Credit Cards

Credit cards are a very close alternative to payday loans and you can receive instant approval, except customers have to wait a few days for their credit card to arrive in the post.

Once you receive the credit card, you have a credit limit of £200 or £2,000 which can be used towards purchases and it may come with other perks such as air miles, nectar points or cashback. 

Using a credit card can be completely interest-free and 0% if fully paid on time. There are some credit cards that cost money and require monthly fees if they come with big bonuses and perks such as Avios or Air Miles (see credit cards with air miles) and this might command a monthly fee of £100 or £200 per month, just to have the card.

But generally speaking, a credit card is free if paid on time, and they will charge interest if repayments are late, ranging from 0% to 36% for customers with bad credit.

Personal Loans

Personal loans are very similar to payday loans, in the sense that they are used to pay for personal purchases and expenses (and not for property purchases or business expenses). 

Personal loans can be available for large sums, ranging from £100 to £25,000 and repaid over 1 to 7 years, but they require customers to have good credit scores, with rates available from as long as 6%.

Whilst they might be a good alternative to payday loans online when you need to borrow £500, this might be unavailable to most payday loan customers due to the credit score requirements.

Logbook Loans

A logbook loan allows you to borrow money against your car, bike or van, using this as collateral for your loan.

If you have found that you have been declined for other types of mainstream loans or products, or even rejected for payday loans, using a logbook loan can be a viable alternative.

Your car or vehicle should ideally be less than 5 years old and be in good working condition. Based on the quality of the vehicle, its age and your personal details, you could borrow 50% of your vehicle’s value.

However, the interest rates are quite high, at around 400% APR and you could risk losing your vehicle if you are unable to keep up with repayments.

Secured Loans

Secured loans enable you to borrow money secured against your property. This could be useful for borrowing much larger sums than a payday loan, such as £5,000 or £10,000.

The idea is that your property such as your home or flat is used as collateral and based on its value and your equity in it, you can borrow an amount over 1 to 25 years.

The rates are very low, starting from 6% APRC, just note that your property is at risk of repossession if you cannot make your repayments or repay your loan.

Pawnbroker Loans

With pawnbroker loans, you can borrow money against valuable items of jewellery, watches, art or anything else that you own of significant value. You can usually borrow around 70% of the item’s value and this is charged at around 120% APR.

However, like most asset backed loans, the lender can relinquish the item if you are unable to maintain your repayments.

Credit Unions

Credit unions are not-for-profit organisations and offer an extremely low way to borrow money at rates of around 26% APR. To be eligible, you usually need to be within the local community of that credit union or working in the public sector such as a teacher, nurse, policeman etc. 

Credit union loans can be very useful and because they are community focused, they can be very lenient with late repayments and sometimes do not even charge added fees for defaults. But just note that they do not have the savviness of payday lenders and can take a few days or weeks to be approved and funded.

Borrowing From Family and Friends

And last, but certainly not least. Borrowing from your family and friends is certainly the most sensible way to borrow money for an emergency or any important purchase.

Whilst payday loans carry some of the highest interest percentages around, it is usually free to borrow from your parents, siblings or close friends, because they often want to help you in an important time or time of need. You can also avoid credit checks because the transaction is usually verbal and based on trust.

Our only recommendation would be to put some guidelines and expectations in place in terms of when you are planning to repay and the final amount, since this can avoid future conflict and fallouts between your loved ones.