Payday loans are useful and popular for many reasons: they are accessible even if you have bad credit, you can typically apply online 24/7 and the money is deposited instantly into your bank account if your application is approved. This means you can solve almost any small, short term cashflow issue quickly and easily. However, payday loans can be an expensive form of borrowing so they aren’t always the right type of credit for your financial needs. You might be wondering what alternative types of credit are available. So here we’ll share a few different ways to borrow depending on your circumstances and what to consider when choosing a form of credit from interest rates to your own money management abilities.
Credit cards are revolving credit products which means you can borrow and repay the balance as often as you need to, for as long as you need to. They can help spread large purchases over several months and they have additional consumer protection measures that other borrowing services do not have. Credit cards only require a minimum payment each month, though you would be advised to repay as much of your balance as possible to avoid unnecessary interest. Getting a low interest rate or a high credit limit is typically dependent on your creditworthiness, so people with a poor credit history may struggle to access this kind of credit.
Credit lines are somewhat similar to credit cards in that they are also a revolving credit service. You can withdraw from your credit line and make the repayments as suits your cashflow needs. Credit lines also require at least a minimum payment, but unlike a credit card, when you withdraw the funds, they are deposited directly into your bank account. Credit lines can help you manage your everyday cashflow as well as large, unexpected expenses. They generally have high acceptance rates, so having a bad credit file does not mean you will be automatically declined, though the interest rate could be higher than some credit cards and your application would still be subject to a creditworthiness and affordability assessment, as with all regulated lending in the UK.
Personal bank loans tend to come in the thousands, typically between £5,000 and £15,000. They can help with large, planned expenses like a new car or a house extension, and banks will often want to know why you want to borrow before they consider lending to you. They have quite low interest rates, but the interest can accrue quickly given the large loan principal, and the loan terms which usually fall over a few years. Personal loans are often only accessible to those with a good credit history.
Credit unions often offer their members wider accessibility to loans than a typical bank would. They are not-for-profit organisations that focus on member needs, meaning they can charge lower interest rates and consider people who might be financially excluded from mainstream credit. You have to be a member of a credit union to apply for a loan, and the loans available vary massively between credit unions. Some may only be able to provide small loans in the hundreds, whereas some have been known to supply mortgages, so using a credit union loan would depend on what your credit union offers as well as why you need to borrow.
Compared to the above options, payday loan companies charge the highest rate of interest, however, this doesn’t mean they are the most expensive way to borrow in all cases. Because interest is charged as a percentage, a bigger loan principal means a bigger amount of interest, even if the interest rate is the same. For example, if you borrowed £100 at 10% daily interest rate, you would need to repay £110 after 1 day. This is the £100 that you borrowed and £10 in interest. If you borrowed £1000 at a 10% daily interest rate, you would need to repay £1100 after 1 day. This is the £1000 that you borrowed and £100 in interest.
Even though the interest rate is the same, the actual amount of interest you need to repay is different, because the amount you borrowed is different. So, although payday loans are capped at a daily interest rate of 0.8%, they aren’t necessarily more expensive than other forms of borrowing, because you can only borrow small amounts with a payday loan. Ultimately, you need to make sure you use credit that is suitable and affordable. This doesn’t mean opting for a £5,000 personal bank loan at a low APR, for example, if you only need to borrow £200. Taking out too much credit could actually cause you more problems in the long run, as you could struggle to meet the repayments.
Choosing a type of credit isn’t always that easy – that’s why there are so many money help websites and advice centres dedicated to helping you navigate your finances. The one key rule through all borrowing is to make sure the repayments are affordable throughout the duration of the borrowing term. There’s no point taking out a 6 month instalment loan, if you know your disposable income is reducing after 2 months of repayments. While you can’t always predict cashflow issues, it helps if you at least consider your known upcoming expenses before applying. In most cases, you might just need a bit of careful budgeting, but if you know you may struggle in one or two months to meet the full repayments, consider opting for a type of credit with flexible repayments or a shorter repayment term instead.
You also need to think about how well you manage your money. Unfortunately, most of us won’t have had much financial education during school, so poor money management isn’t uncommon. While you might be fine with your current financial commitments, adding new ones into the mix could cause financial difficulty. Only borrow if you need to and consider using fixed term loan products instead of running account credit if you can be tempted to overspend or if consistent repayments are easier for you to manage.
If you’ve decided what kind of credit to use, the next step is to compare loan lenders to find one that meets your needs. This could simply be the cheapest lender, or it might be a lender who offers smaller instalments over a longer period, early repayment options or credit limit increases.
It only takes a minute or two to compare your options using comparison sites and it could save you a lot of money!
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