Payday loans can be a tempting option to get out of a financial tight spot, but it is a wildly expensive way to borrow and is only meant to plug a short-term cashflow problem. If your cashflow hiccup is not resolved within a month, a payday loan could make a bad situation worse and trap you in a debt spiral.
So before you head off to Wonga or whoever, what are the alternatives?
1. Cut spending and budget
The recent bank holiday bonanza may have stretched your finances, but if you get on top of your budgeting you can make sure you have enough cash to have a little fun, without ending up in the red.
Just looking at your monthly spending habits can make you realise you need to exercise some restraint - especially when it comes to restaurant trips, shopping and entertainment. A payday loan to cover these sorts of expenses is just not necessary - despite the persuasive ads the lenders use - as the risk of falling into debt is too great. A budget can get you back on track so you have enough for both bills and treats.
Why not check out our free MoneyTrack budgeting tool?
2. Sell some old stuff
Whenever I have been in a financial jam, I have sold some of my old things to raise some extra cash to get me through.
The best payday loan could come direct from your employer.
Asking for an advance on your wages could mean you meet the shortfall an unexpected bill or car repair causes, without the risk of falling into a pit of debt. Companies with a good cashflow may be willing to pay an advance on your wages and usually take the amount out of your next payslip.
Another way your employer may be able to help is by allowing you to do some overtime to boost your pay and iron out the bumps in your expenditure.
4. Turn to friends and family
Turning to your family or even your friends for a loan could prevent you from falling into a spiral of debt. With luck, they may even lend you the money interest free.
Just remember to treat paying back a friend or family member as seriously as you would an official lender. After all, you don't want them to fall into debt because you haven't lived up to your side of the deal. If you want to make it official and reassure those close to you that you will repay, write down an agreement clearly marking the exchange as a loan not a gift.
5. Look at your entitlement to benefits
The benefits system in the UK is highly complex ,so many of us are unaware of the benefits we may be entitled to.
If you are pregnant, on a low income, caring for someone, have been bereaved, aged 60 or over, ill or disabled or even if you are unemployed then there is a chance that you could be entitled to a range of benefits such as Working Tax Credit, Child Benefit, Income Support, Jobseeker's Allowance or Council Tax Benefit.
Use this handy tool from Directgov to double check you are claiming all the benefits you qualify for.
6. Ask your bank for an authorised overdraft
An authorised overdraft with your bank is an alternative form of borrowing that is far more affordable than a payday loan.
Interest on overdrafts that are agreed formally (rather than used accidentally, which can incur all sorts of charges) typically have rates between 12% and 20% AER.
I recently used an arranged overdraft to cover a costly car repair, which I hadn't been able to budget for, that was agreed instantly online by my bank . It cost £25 to arrange a £400 overdraft and I took two months to pay it back, incurring interest of around £4. If I did the same with Wonga for example and borrowed £400, I would have to pay £125.48 in interest and fees, meaning I would have had to pay £525.48 after a month
Tthe most I could repay was £200, so I would have ended up being caught out and paying back more.
7. Consider a local credit union loan
Credit unions are not-for-profit, community-based organisations that provide transparent savings accounts and affordable loans to its members. Credit unions have a common community bond, so you could find yours where you live or where you work.
My local credit union, which I found using the Association of British Credit Unions Limited, offered cheaper payday loan,s that you could choose to repay over three months, at an APR of 26.8%. It also offered more affordable loans for those in debt with a poor credit history at 13.86% APR.
Of course, there are better deals elsewhere on loans, but if your financial situation has caused your credit rating to suffer you may not have access to those other avenues.
8. Look into a budgeting loan
A budgeting loan is available from the Government to those on income support, income-related employment/support allowance, income-based jobseeker's allowance and pension credit and is available if you need to pay for a particular range of expenses.
The loans are between £100 and £1,500, are interest free (so you only pay back the amount you borrowed) and you have 104 weeks in which to pay them off.
9. Seek free debt advice
According to the CCCS, 45% of people wait over a year before asking for debt help. If your finances are out of control and you consistently turn to payday loans, you should seek advice. There are a number of charities that are dedicated to helping those in financial difficulty such as the Consumer Credit Counselling Service (CCCS), National Debtline and the Citizens Advice Bureau.