Reviewing Payday Loan Alternatives

Before reviewing and getting into the details of the different types of loans and credit products in general, it is helpful to go back to the start. Credit and loans can be categorised in many ways however one of the more fundamental differences is whether there is any security or collateral underlying the loan. Put more simply, if someone is unable to repay, could the lender seek alternative repayment from another source? If the answer is yes then this can be termed a secured loan. The opposite therefore is an unsecured loan. Confusing? Well luckily, we have put our thoughts down in one place to assist you when assessing the differences between the two, when you are looking for finance. We specialise in unsecured loans and more specifically payday loans.

What is a payday loan?

Payday loans can be described as short-term loans for relatively small amounts of money. They are available from physical shops and online. Payday loans tend to be held only for a short period typically until a customer's next payday. There are many options available for short term credit, such as an authorised overdraft, however these may be limited depending on the borrower's credit history and ability to afford the repayments. Payday loans generally carry higher interest rates. This is because the lender needs to price in the risk that the borrower is not going to repay. There may be other ways for a borrower to address their short-term cash flow issue. It is important that prospective borrowers think carefully about the alternatives before they borrow from a payday lender. If one does decide to get a payday loan, it is important to shop around and compare the interest and charges before borrowing. Make sure the terms and conditions are clear about what will happen if a loan is not repaid on time.

Before you take a payday loan

Make sure you shop around for the most suitable provider. Remember to compare on price and non-price factors, such as customer service and features available. Read the reviews that are available on third party websites. You can see our reviews or visit an independent third party who also collects reviews of us. This site not only collects reviews from customers who visit on their own but also where we have asked them to review our services. We think a nice mix between the two is important for a balanced and representative view. Lenders who offer payday loans online must list their products on at least one price comparison website so prospective borrowers can compare their deal with others. The price comparison site must be regulated by the Financial Conduct Authority (FCA).

Moneyboxes falling from the sky representing payday loans

Next a customer can check the Financial Services Register to see if a potential lender and indeed the price comparison website is regulated. Ensure that the company's name is used rather than the website name when searching. This can be found on their homepage or in their legals section. It is important to only deal with regulated firms. If a site, be that a lender or broker, is offering payday loans and is not listed on the Financial Services Register, this may be illegal and the FCA must be informed.

What is an instalment loan?

An instalment loan is a credit product which is repayable via a set number of scheduled payments over the life of the loan. This is different from a traditional payday loan where the payment is due in one single payment, usually on a customer's next paydate. This form of repayment schedule is quite common where the overall amount borrowed is relatively large. It is a feature that is common to both secured and unsecured loans (which we shall cover later on), For example, an unsecured loan that you take out to cover the costs of a wedding as well as a mortgage, are typically repaid in instalments. The frequency of the instalments can vary from product to product however the vast majority require monthly payments. This is very much in line with a monthly pay cycle which is the most common pay frequency here in the UK. Just to add some confusion to the mix, a credit card may require a monthly minimum payment but it should not really be considered an instalment loan.

What is a credit union?

It's not a new idea by any stretch. Most think of credit unions as being a small local organisation perhaps attached to a church or other established community function. There is a degree of truth in this however to think of credit unions as being very small informal affairs is not correct. According to the Association of British Credit Unions there were, in 2017:

  • Around 305 credit unions across England, Scotland and Wales employing more than 1,700 staff
  • 1,290,545 customers of credit unions, including 136,491 youth savers
  • Total assets of £1.5 billion
  • Total loans of £803 million
  • Total deposits of £1.25 billion
  • Annual turnover of £113 million (year to June 2017)

At their core, a credit union is a co-operative which accepts deposits from savers and lends money to borrowers. Credit unions are typically established by a group of members with a shared common interest, for example residing in a local area, belonging to a church or community group. They may offer savings, loans, bank accounts and in some instances mortgages. Unlike banks, credit unions are not-for-profit enterprises. Any profit is re-invested back into the union so that it can offer a wider range of services to its members.

A credit union has the aim of being an alternative to a bank across the whole range of banking services, including saving. Saving with a credit union now operates in much the same way as a bank in that they offer a savings product which pays interest on the funds deposited. It used to be a different method that involved a yearly dividend payment to encourage long-termism however, in order to be more attractive to compete with traditional banking providers, credit unions have changed.

What is running account credit?

A pretty subtle variation and a feature most often associated with a credit card, so much so that often people will use the terms interchangeably.

The Financial Conduct Authority (FCA) define running account credit as:

FCA definition of running account credit taken from the FCA handbook

Source: FCA Handbook

As mentioned above this type of facility is often connected to credit cards so it would make sense to explore the world of plastic.

Essentially a credit card is just a piece of plastic but behind this physical object is a loan or an extension of credit from the credit card issuer to the card holder. The card is the mechanism by which the card holder can borrow and this is most often at a point of sale. What is a point of sale? Well really that is a fancy term for the checkout or some other point where you would conclude a transaction. Instead of handing over cash you hand over the card. The merchant will then ask you to tap, swipe or insert the card to request funds from your card issuer to cover your transaction. With a successful transfer (or indeed promise of a transfer), you can leave with your purchase or settled bill.

Point of sale, insert credit card

Revolvers and transactors

The amount of credit extended attracts an interest charge which is how the card issuer makes their crust as it were. Often the card issuer has a period of time where they do not charge interest which is known as an interest free period. If you settle your credit card bill in full i.e. the balance outstanding, before that interest free period is up then you will not have to pay for the credit being extended. As with everything in the financial world it seems, there is some accompanying jargon describing those that pay in full and those that pay off only a bit of the outstanding amount when asked (usually monthly). Those that pay in full are known as "transactors". Those that do not pay off the full amount when asked are known as "revolvers".

What is an overdraft?

An overdraft is a facility that is connected to your current account with your bank or building society. It is connected to the concept of a running account as defined above. Once you have exhausted the actual cash in your bank account, your bank will continue to honour payment requests i.e. lend you the cash. Essentially, it's another form of credit. Typically, a bank will charge for this service so make sure you check carefully. You may ask for an overdraft or one may automatically be attached to your current account. It depends on the type of account you have.

Types of overdraft

Authorised overdrafts: These are confirmed by your bank before you need to use it. Typically the bank will set a borrowing limit. This means you can continue to spend money up to that limit through all the normal payment methods associated with your account i.e. your debit card or a cheque. Even with authorised overdrafts there are often fees and charges although you will know about these when you agree to the overdraft.

Unauthorised overdrafts: Also known as emergency or unplanned overdrafts. These often carry heavier fees and charges than authorised overdrafts. As above, the bank will continue to honour payments even when you have run out of available cash up to a certain limit. The difference is that the bank has not agreed that this can happen in advance. Note that an unauthorised overdraft can happen when you have exceeded your authorised overdraft. Expect to pay extra charges and these can mount up very quickly so be very careful.

Things to do before a loan application

It is important that you do your research before committing to borrow so you know the terms and conditions of the loan and how the repayments will affect your finances.

First thing you need to do before you apply for a loan is check the state of your credit file. This will show how much credit you currently have as well as whether you've missed any repayments or paid late over the past six years. If these or other details such as your current address are wrong, you need to put them right before you apply. You can check your report by contacting the three main UK credit-reference agencies, Experian, Callcredit, and Equifax: by law, they all have to offer a basic copy of your report for £2 each.

Draw up a budget to see what you can afford to repay every month: this can also help you to identify whether there are any areas where you can cut back. Try not to be overly optimistic about income rises and make sure to budget for any income shocks such as losing your job or illness etc.

Lenders are obliged to offer their advertised rates to just 51% of customers, but anyone who is deemed higher risk, perhaps due to a bad credit history, could be charged more. Make sure you take this into account before you apply. At 247Moneybox our representative APR and a representative example is on our home page.

It is important to shop around making comparisons between a number of lenders so that you can get the best deal. Price or rate is not necessarily the only thing you might want to consider. Other factors include flexibility, term and features such as the ability to take a break from repayments.

As part of your comparison of lenders, why not check out what other people have been saying about them. It is best to look at independent review sites as they are likely to be less bias than the testimonials collected by the lenders themselves and displayed on their website. Bear in mind though that with reviews, people that have had a great experience or a terrible experience tend to dominate. To counter this, make sure there are a good number of reviews to ensure overall accuracy.

It can be useful to play with the amount of time you will have the loan and the amount borrowed to determine how it can fit in with your finances. However, bear in mind that typically, the longer the duration, the more interest you will pay, even though monthly repayments might be less.

So hopefully now you have a good idea of the alternatives to payday loans and the options available to you. Should you have any questions wth respect to our product why not check out our questions page.