The Government has finally pledged to curb exorbitant payday loan costs, but only from early 2015 and it hasn’t yet decided what level interest will be capped at. For now, borrowing from payday lenders will continue to incur rates of around 20 per cent for 20 days, equivalent to thousands of per cent APR.
Here are six alternative forms of credit, besides traditional bank loans, that will often be cheaper.
1. Credit union loan
Credit unions are not-for-profit financial cooperatives that provide affordable loans with typical APRs of around 12.7 per cent (capped at 26.8 per cent). Loans are available to people excluded by mainstream lenders and the wider public. There are no hidden charges and there are no penalties for early repayment.
To find your local credit union visit findyourcreditunion.co.uk or call the Association of British Credit Unions (Abcul) on 0161 832 3694.
2. Peer-to-peer loan
Peer-to-peer websites are a go-between for individuals who want to make a return on their cash, and others who want to borrow at affordable rates. At Zopa, the oldest UK “p2p” site, the typical APR on a three-year loan of £7,500 is 4.8 per cent including a borrower’s fee, and again there is no early repayment charge.
The biggest lenders including Zopa and RateSetter have signed up to industry operating principles (see here). The sector will be regulated by the Financial Conduct Authority (FCA) from next April.
3. Authorised overdraft (or extension)
Authorised overdrafts from your current account provider may deliver cheaper borrowing than payday loans. Still, they can be pricey compared to other credit as banks charge interest of around 20 per cent a year and/or a daily, weekly or monthly fee. Do double-check your bank’s rules before going into the red.
The Government-backed Money Advice Service has a good beginner’s guide to overdrafts here.
4. Credit card
Again, there are risks, but if you’re smart about it, it is cheaper and more flexible to borrow using a credit card than from payday lenders. Short-term borrowing is free if you clear your balance each month.
If you don’t, typical APRs on plastic are around 18 per cent. There are plenty of 0 per cent balance transfer deals available where you pay no interest on debt transferred from an existing card for up to 29 months, but do factor in transfer fees.
5. Pawnbroker loan
Pawn loan rates are typically much cheaper than payday rates, with APRs of around 80 per cent to 120 per cent, and they’re also available without credit checks. Of course, you will need something like a piece of jewellery, a gold coin or a quality watch to pledge, and you may lose it if you can’t make repayments on time.
6. Borrowing from family or friends
Many people feel uncomfortable about asking to borrow money from family or friends, and there is certainly the risk that any misunderstandings or failure to repay will affect your relationship. Still, if you can agree simple terms for a small loan and are sure you can honour them, this can be an excellent fallback.