Payday loans – other ways to borrow

You might be considering taking out a payday loan to pay for an unexpected essential cost, such as repairing your car or replacing a washing machine.

Payday loans are really only suitable for an advance before payday. If you’re going to have to take some time to repay the loan, it’s important to explore alternative forms of credit.

A payday loan is almost certainly not the answer if you need the money to:

• regularly pay household bills
• pay your rent or mortgage
• pay back people you owe money to.

If you’re struggling to pay for the essentials, but you’re not yet missing payments, there might be ways to cover these costs.

If you’ve already missed payments on essential household bills, it’s important you speak to a debt adviser as soon as you can. They can help you work out a budget, prioritise your debts, talk to everyone you owe money to and help set up a repayment plan.

There are lots of organisations that can help with free, confidential debt advice.

Payday loan companies might advertise payday loans for things like nights out, new clothes or other treats.

But if you do this, you’ll end up paying much more than if you waited and saved the money to pay for them.

And if you just can’t wait, there are usually far cheaper ways to borrow. Here are some ideas to think about first.

Personal loans can charge reasonable rates of interest, depending on your credit score and other factors.

However, you might end up borrowing more than you need. This is because most lenders won’t offer loans of less than £1,000, which might be more than you need for a household purchase.

There will also be minimum repayment terms, which might not be suitable if you only want to borrow money for a short period of time. 

Most Buy Now Pay Later (BNPL) services allow you to buy things without paying for them upfront or during a promotional period, typically up to 12 months.

BNPL products have been used to spread payments on catalogue credit, store cards and finance at the point of sale.

Many online BNPL providers now offer you the option to spread the cost of shopping online, by either:

• paying the full amount after an initial period, or
• breaking down the amount owed into smaller interest-free payments that are repayable over several months.

That’s why it’s really important to keep track of:

• how much you’ve paid
• how much you still owe
• your repayment dates.

Some organisations offer their employees the opportunity to access some of their salary or wages before payday. These schemes are usually provided to the employer by external companies.

If your employer belongs to an ESAS scheme, this can be a useful way to pay for unexpected costs and deal with short-term cash shortfalls that occur between paydays.

If you want to use a salary advance scheme, be aware that:

• most schemes will charge you a fee – these can build up if you regularly take payments in this way
• taking regular payments can make you dependent on the scheme
• you’ll have a reduced salary to live on during the month after you’ve paid back an advance – try to avoid ‘rolling over’ from month to month
• it’s hard to compare the cost of fees with loan interest rates and the closer to payday you draw down money, the higher the relative cost
• these schemes aren’t regulated by the Financial Conduct Authority (FCA) so you have fewer statutory protections if things go wrong.

Some organisations also offer salary-based loans or ‘credit top-ups’. These are standard credit products that you repay through deductions from your salary. They are separate products to ESASs.

Borrowing emergency money from a family member or a friend can help you avoid the risks that go with payday loans.

But make sure that both you and the person you’re borrowing from take the time to:

• put your agreement in writing
• work out a budget and a repayment plan
• discuss what will happen if you’re late paying it back or can’t repay it at all.

Avoid borrowing from people who you don’t know well, such as casual acquaintances, friends of friends, or people you recognise in your local community.

If someone you don’t know well enough to be confident about trusting offers to lend you money, steer clear – they might be a loan shark.

If you’ve got a credit card, consider using it for purchases. But make sure you pay back as much as you can each month, to keep costs down. And don’t be tempted to spend more than you can comfortably afford to repay.

It’s not a good idea to use a credit card to withdraw cash because you’ll be paying interest from the day of the withdrawal, even if you pay the bill off in full. You might also be charged at a higher rate of interest than on purchases.

There are credit cards especially for people with a poor credit rating – for example, because of previous defaults or County Court Judgments (CCJs). These are normally known as credit builder cards.

They charge a much higher rate of interest than other cards. But as long as you repay all or most of the balance each month, they’re likely to be cheaper than a payday loan.

If you don’t manage to repay the balance on your card each month, it’s still likely to be far cheaper than a payday loan. But try to pay off as much as you can.

If you have a current account, you might be able to apply for an overdraft from your bank.

These can be fairly expensive (although there are some interest-free overdrafts) – but it will usually be cheaper than using a payday loan.

If you go into an overdraft without your bank’s permission, they can choose to decline your payments and this could affect your credit rating.

A more affordable alternative to a payday loan is a loan from a credit union. Credit unions are community organisations run by and for their members. 

They are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority.

Credit unions operate with three main aims:

• to provide loans at low rates of interest
• to encourage all members to save regularly
• to help members in need of financial advice and assistance.

Credit unions act in the interests of all members and so try to ensure they don’t let their members take out loans they cannot pay back by assessing their income and, in some cases, how much they’ve been able to save.

There’s a cap on the amount of interest they can charge – 3% a month or 42.6% a year APR for England, Scotland and Wales, 1% a month or 12.68% APR for Northern Ireland.

Community Development Finance Institutions (CDFIs) are small independent organisations that offer loans to people who struggle to access credit from high-street providers.

They tend to offer a personalised service and reinvest any profits they make back into the community. However, CDFIs typically charge higher interest rates than credit unions.

Community Development Finance Institutions, credit unions and all other organisations offering consumer credit have to register with the Financial Conduct Authority (FCA), and abide by their rules and standards.

You can find details of CDFIs on the Finding Finance website which is run by Responsible Finance (the membership body for CDFIs). 

Do you really need to borrow money and you’ve been claiming certain benefits, including Universal Credit for at least six months? Then you might be able to apply for an interest-free Budgeting Loan or a Budgeting Advance.

Do you need help with heating, fuel or food bills, or have an emergency expense? Then you can see if your local authority has a local welfare scheme that can help.

Applications are assessed on a case-by-case basis and you have to be on a very low income or claiming certain benefits to qualify:

• If you live in England, this scheme is run by your local council but not all councils offer one. Find your local council at gov.ukOpens in a new window
• If you live in Scotland, find out more about the Scottish Welfare Fund at mygov.scotOpens in a new window
• If you live in Wales, find out more about the Discretionary Assistance Fund at gov.walesOpens in a new window
• If you live in Northern Ireland, find out more about extra financial support at nidirectOpens in a new window