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Alternatives to payday loans

Alternatives to payday loans

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Last updated: 25 August 2021

Payday loans are probably the riskiest way of borrowing money available. Marketed as a fast-cash solution to short-term money woes, they should only ever be considered as a last resort. 
There are other ways to borrow money available which you should always consider first. Let’s take a look.

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Bad credit loans

A lot of people turn to payday loans due to having a poor credit rating, limiting their potential to get bank loans. However, there are options available through different lender types who offer bad credit loans.

These personal loans often come with high levels of interest due to the risk involved, or will require a guarantor to be approved, so ensure they are worth it before committing.

Credit cards

You can use credit cards both for purchases and cash withdrawals. Provided you meet the minimum monthly repayments, they can be a cost-effective way to borrow.

However, you may not be approved for a credit card if you’ve got a bad credit history. In that case, there is still an alternative to payday loans: credit builder cards. These are specifically designed for those with bad credit looking to improve their score. They come with much higher rates of interest, but as long as you meet your repayment requirements you’ll find it’s considerably cheaper than a payday loan.


If you have a current account, you could apply for an arranged overdraft with your bank. What this does is allow you to borrow up to a pre-agreed limit beyond your balance.

While some banks used to charge costly overdraft fees, the FCA have now put a ban on these; meaning you’ll only be charged interest on your overdraft. APR is typically lower on overdrafts, so they’re a good alternative to payday loans.

You can use your overdraft as and when you need it, however be cautious of surpassing your limit. If you do, you’ll enter an unauthorised overdraft and this could negatively impact your credit score. In addition, be aware that overdrafts can take a couple of weeks to apply and be accepted for.

Pay advance

It’s always worth asking your employer if you can have an advance on your pay cheque for wages you’ve already earnt. They may do this as a one-off.

In the same vein, there are also salary advance schemes – these are when companies work with employers to enable them to offer advances to their staff. These can then be repaid either at an agreed rate, or with no interest but with usage fees included. In both cases, salary advance schemes are a much cheaper alternative to payday loans, so check whether your employer runs one.  

Credit unions

Using your local credit union can be a more affordable way to borrow, particularly if you’re struggling to get approved for a loan via a bank or building society.

Credit unions loan small sums and put the profits they earn back into community projects. As non-profit organisations, they tend to be more accepting of those with less-than-stellar credit histories.

One thing to note; unlike when you compare loans from a vast pool of lenders online, your options will be much more limited with a credit union. However, you will find the rate is far more competitive than what you’d get with a payday loan as credit unions are only allowed to charge up to a set amount – in England it’s 42.6% APR a year – so it’s worth exploring as an alternative. Head on over to the Association of British Credit Unions’ website to find your nearest.

Smart credit facilities

A more innovative way of borrowing, smart credit facilities have become a popular option in recent years. With these, you’ll pay a monthly membership fee which enables you to take out interest-free loans when you need them. You’ll maybe get one or two available loans per year. Monthly fees are fairly cheap too, so it can be a really cost-effective way to borrow.

Borrow from friends or family

We appreciate that borrowing from friends or family simply isn’t an option for many people, but it’s certainly worth looking at if you can. Your credit file won’t be impacted and you can negotiate the terms with the person lending to you directly. Whether or not you pay interest is down to them, but one thing is for sure; it’s a much safer alternative to a payday loan. That being said, money can complicate relationships, so be certain you can keep up with your repayment agreement.

Welfare assistance schemes

If you’re considering taking out a payday loan to pay for essentials like food, clothes and heating, then get in touch with your local welfare assistance scheme. In addition to running food banks, some centres offer pre-payment cards or vouchers for other essentials.

Similarly, if you’re claiming any benefits then you could apply for a budgeting loan, which is interest-free.

Should I get a payday loan?

The short answer is no; the longer answer is you should avoid them at all costs if you can. Try and explore every borrowing option we’ve outlined here first, as these will almost certainly provide you with a much cheaper alternative to payday loans.

Nevertheless, if you do decide a payday loan is the only method of borrowing to suit your needs, make sure you run a short-term loan comparison first so you can at least get the most competitive rate available.


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Michael Quinn

Author: Michael Quinn

Michael is a dedicated author helping usave to write guides, blogs and news for the last four years. When not writing articles, you can usually find him at wine tasting events or having a political debate on the night tube.

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