Payday loans are a way of covering emergency expenses between payments and are a form of high-cost, short-term lending (HCSTL). Many people in the UK that need to borrow money online may turn to payday loans as a solution.
For some people, taking out payday loans in the wrong circumstances and for the wrong reasons can lead to some rocky finances. As an alternative, there are different options available that may be more suitable for those looking to borrow money.
What Are Payday Loans?
Payday loans are a type of short-term loan intended to tide you over between paydays and cover any unexpected expenses that may arise. Depending on the lender, you can usually borrow between £50 to £1,000 and will need to pay back this value when you are next paid by your employer.
Payday lenders can often fund loans very quickly, with money transfers in as little as one business day. However, if you need to borrow £200, the lender will apply interest and additional fees, making it a costly borrowing option.
Why Payday Loans Are Not Always the Best Option
Payday loans are designed for short-term use only, typically between two to four weeks. During this time, the borrower will be charged interest on top of the principal amount of the loan. If you have longer-term financial issues, you may want to look to alternative forms of borrowing in order to save money in the long run. Payday loans should only be used to cover emergency payments; any other expenses should not be paid for using this option.
What Are the Alternatives to Payday Loans?
If you are looking for a form of short-term borrowing but want to avoid the high-interest rates, there are various other options available, including options that can allow borrowers to apply for specific amounts, such as a 500 loan or a £2,000 loan.
Personal loans - Personal loans can be a way to borrow a larger amount of money and typically far more than you would be able to receive from a payday loan. In addition, they tend to offer relatively affordable rates.
However, approval of a personal loan and the terms of the loan are usually contingent on your credit score and other financial factors. They may also come with minimum repayment terms, which may not be suitable for those wanting to borrow money just for a short period of time.
Buy now, pay later - Buy now, pay later (BNPL) services allow you to purchase items and only pay part of the full amount at the point of purchase. The rest of the payments are made in instalments, often with no interest. There may also be the option to pay the full amount after an initial period. They are a way to spread payments so that you are not hit with one big lump sum payment.
Pay advance from your employer - Pay advances, or employer salary advance schemes, are offered by some organisations as a way of advancing employee wages before payday. If your employer has one of these schemes in place, it could be a way to cover any unexpected costs or cash flow problems that may crop up between paydays.
Borrowing money from family and friends - If you are having emergency financial trouble, you could look to family or friends in order to borrow money and avoid the risks that come with taking out a loan. If you opt for this option, you will need to treat the borrowed money as you would any regular loan, making sure to write out the agreement terms and work out a repayment plan.
Credit cards - Credit cards can be a good way to pay for purchases as long as you can keep your costs low enough for regular monthly repayment. Spending beyond your means could lead to debt problems and having to pay back high-interest rates. However, if you can keep your credit utilisation rate around 30% or below every month and can comfortably afford your monthly statements, credit cards could be a way to fund your emergency expenses.
