How to compare payday loans to other loan products?

Comparing payday loans is now easier than ever because since 2017, online payday lenders are required to have the details of their loans published on an FCA-authorised price comparison website. So, you can find the best loan for your needs, without having to do all the research yourself. But how do you compare payday loans to other credit products? When the annual percentage rate (APR) doesn’t really relate to the actual amount you repay on a payday loan, it can be difficult to know what you should be comparing to find the most appropriate product for your needs.

Payday loans are a form of high cost short term credit which means they can be an expensive way to borrow, but that doesn’t mean they’re always unsuitable. We’ll share a few alternatives to payday loans depending on why you might need to borrow, and the key points of comparison to help you choose a sensible borrowing option.

Alternatives to Payday Loans

There are a lot of borrowing options on the market at the moment, but not all of them are accessible to everyone and not every type of credit is suitable for every purpose. If you have a poor credit history, finding a way to borrow that meets your needs can be even more difficult, as a lot of mainstream lenders will only accept people with an excellent credit score. An alternative to payday loans, if you have a bad credit file, might include a credit line or guarantor loan. Credit lines are running account services, so they don’t have a fixed term. This can help you to manage your day to day cashflow and to spread the cost of large expenses. Guarantor loans are similar to payday loans, but you need a trusted friend or family member to act as a guarantor – someone who will repay the loan if you are unable to. If you have a good credit record, but you’re new to borrowing or not sure where to start, then you may want to consider credit cards or even a personal bank loan if you’re planning a large expense, if payday loans don’t quite match your requirements.

Having a good credit history can help you access a variety of credit products and might help you secure larger credit limits or lower interest rates, so it’s important you try to improve your credit score wherever possible.

Key Points of Comparison

If you’re stuck between a couple of ways to borrow, or you’re just doing some background research on the different types of credit before applying, there are few things you need to consider and compare across the market.

How much the credit costs

While all lenders will state the APR on their website, it doesn’t always help you compare loans and credit products because the borrowing terms can vary and so an annual percentage rate may not be applicable. If you are comparing products with a similar loan term, then comparing the APR can help, but otherwise, it might be easier to compare the actual amount the credit costs. Usually, lenders will put a representative example on their website, or they might have a loan calculator so you can see how much the monthly repayments would be or how much the total amount repayable is. It’s better to compare these figures as you’ll have a more grounded understanding of the costs and you’ll see the difference in pounds and pence. It’s worth remembering that the annual percentage rate is based on you borrowing for a full year, which is why APR is often misleading when it comes to payday loans, because you only borrow a payday loan for a few months.

Repayment Flexibility

Depending on how long you want to borrow for, finding a borrowing option with repayment flexibility might be something you want to compare. For example, if you only want to borrow a small amount of money for a couple of months, then a fixed term loan like a payday loan might be suitable as the repayments will likely be manageable in the short term. If you’re looking to borrow a large sum of money, it’s reasonable that you may experience additional cashflow issues during the time it takes to repay the credit, so a credit card or a credit line with the option of minimum payments might be preferable, compared to a bank loan which will have strict repayment expectations each month.

Early Repayment Options

Similarly to repayment flexibility, you may also want to consider whether having the option of repaying the credit early would be a good idea. For running account products (like credit cards, credit lines, overdrafts), this isn’t something you need to take into consideration as you can repay the full balance any time. With loans, it might be less easy, so you should check the lender’s terms before applying if you are likely to be able to repay the loan in full before the loan term ends, or even if you just want to have the option.

If you are likely to be approved

Lenders will often conduct a hard search on your credit file when you apply for credit, which leaves a search footprint that other lenders can see. Submitting too many applications can negatively influence the way lenders view your credit report as it may look like you’re desperate for credit and unable to manage your money responsibly. Therefore, it’s a good idea to do some background research before applying to see if you would likely be approved. While a lender won’t be able to confirm the outcome of your application prior to receiving it, they may offer a soft search option which will demonstrate the likelihood of you being approved, or there may be some information on money advice sites that can help. Payday loans, for example, are often accessible to people with a bad credit history, but personal loans from the bank are not. Credit file records remain for six years so you want to avoid negative information from being recorded wherever possible.

As well as the above, you should always consider if the repayments are affordable and if you actually need the credit. While it can be easy to use credit without really realising – like with overdrafts or buy now pay later schemes – it’s important to remember that your borrowing is recorded on your credit file and not making your repayments on time could make it harder to access credit in the future. If your purchase can wait until you’re next paid or until you’ve saved the money, it’s better to be patient than to borrow. Whether it’s the best instant loans or flexible credit lines, take a few minutes to check your budget, and existing financial commitments before applying.

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