Top five alternatives to short-term payday loans

Payday loans are, as the name suggests, designed to be a quick way to borrow some cash if you run short between paydays. Even with the best budgeting skills in the world if you have little spare cash each month dealing with something unexpected, such as your car breaking down or an essential household appliance dying, can be a real trauma.

Without savings to draw on then applying for a short term payday loan is an obvious next step for many, and with so many lenders and almost instant decisions the whole process is generally very fast and easy.

The drawbacks to payday loans
They may feel like life savers when you are facing a crisis but the reality of short term payday loans can easily turn into a living nightmare. For a start, people generally take a payday loan because they don’t have much (or any) disposable income to save each month. Naturally this means making the repayments will eat into an already tight budget. If there’s nothing much to sacrifice to find the cash then what do you sacrifice? Food? Paying utility bills or other debts you may have already?

This is an easy way into a debt spiral which is very difficult to escape from, and the risk is that eventually another payday loan is taken out to cover essential living costs. Considering that the interest rate is always sky high, and that paying back 50 – 100% of the amount you borrowed is not unusual, it’s extremely difficult to get back on your financial feet once in the short term payday loan trap.

So what are the alternatives?
Realistically, the need for a short term loan option isn’t going to go away simply because payday loans are a bad choice for meeting a cash crisis need. The answer is to look for decent Payday Loan Alternative borrowing options which make managing repayments possible without losing control of the situation. Or you could borrow against your car with a title loan if you have a free and clear vehicle title in your name.

The good news is there are several, and we look at the top five alternatives to short term payday loans in more detail here.

Alternative option 1 – Use your credit card
If you already have a credit card, and it is under the credit limit this is almost always a better bet than a payday loan. The downside is you could take longer to pay it off if you only make minimum payments, but the interest should still be lower. Ideally you can clear the entire debt and pay no interest, then make economies to manage the rest of the following month without using any more credit. [There’s more on this topic at the end of the article.]

Do remember that cash advances bring an extra charge, so if you cannot pay for the emergency goods or service needed on your card it may be better to try another route.

Alternative option 2 – Check out emergency loans (if on benefits)
Several key income based benefits like jobseekers allowance qualify beneficiaries for emergency loans, providing there is any budget in the pot. This does mean filling in paperwork and waiting a short while, but if you are looking at a payday loan for something important but not absolutely essential it’s worth a try.

It’s also worth checking out local groups who support those on low incomes. These exist in person and online on sites like Facebook, and can often help arrange for emergency items like cookers, washers, clothes and so on.

Alternative option 3 – apply for a 0% credit card
Some are designed to take a balance transfer, which then has a limited period of time interest free, others offer the same for new accounts. Applying online is the fastest way to get a decision, and some sites have a handy checker that points you towards those most likely to say yes. This is useful as it avoids negatively affecting your credit score by applying unsuccessfully to a few places. The better your credit score is the longer interest free period you could be offered, but anything is better than the alternative of a short term payday loan. (Especially if you commit to paying the debt off before interest is added, as that is typically charged at a higher rate than a regular credit card would attract.)

Alternative option 4 – ask family and good friends
This can be tricky, but it is worth a try. You could perhaps arrange to borrow several smaller amounts from different people rather than approach just one, and go prepared with a realistic plan (and agreement) of how you will make repayments. For example, arranging an automatic monthly payment by bank transfer shows commitment and good intentions and removes the awkwardness of reminders if you are a day late. Some people may accept part of the repayment in IOUs, say a certain number of hours to be spent on babysitting, house cleaning, dog walking or gardening.

A last resort is to see if anyone would be guarantor on a loan at a more reasonable interest rate. This is a tough one though, as if you default they become liable for the entire debt, something few people, quite understandably, find appealing.

Alternative option 5 – Get or extend an overdraft
It is ever a good idea to go overdrawn without permission, (the charges can be eye watering and worst than any other option), but an arranged overdraft beats a short term payday loan in interest charges by miles.

A few final words of advice

When you face an emergency spend it has to be paid back somehow, whether with or without interest, so to avoid being short the following month try to generate some extra cash.

• Try a car boot/table top/Facebook selling site sale to make cash from unwanted items you have lying around.
• Get debt advice and check if you are receiving all benefits you could be entitled too.
• Look at ways to generate a second (side) income if that is possible.
• Consider your spending and whether you could make switches or sacrifices.
• Check your bank statement for old direct debits still in force.
• Consider switching utility, phone and TV providers for cheaper options.

It is also a good idea to check out local credit unions – a great way to save a little and have access to short term loan with excellent interest rates.