Don’t forget the cheaper payday loan alternatives

Payday loan providers are finding life tough amid tighter regulation and a cap on charges with major player Wonga recently reporting a £37.3 million loss and warning of an even bleaker picture for the year ahead.

Consumers shouldn’t fear the demise of the payday loans industry as there are far cheaper ways to borrow money, even when your credit rating isn’t the best.

Alternative options can prove doubly positive for borrowers as not only do they charge a fraction of payday rates but they can also help you start to improve your credit score in the process.

Specialist Credit Cards

Mainstream credit card companies won’t give entertain your application if you’ve missed a couple of credit payments or have a County Court Judgement recorded against you, even if it’s  from a few years back, but there are a number of specialist credit cards that may be able to help you get back on your feet.

The interest rates are higher than standard credit cards but much less than payday loans. Tesco Bank for example charges a representative APR of 28.9% on its Foundation Credit Card and the Classic card from Aqua comes in at 35.9% APR.

Borrowing £750 on a credit card at 28.9% APR and paying it back by 12 monthly payments of £72.71 will cost you £122.52 in interest over the year, whereas the same amount from Payday UK at 245.5% fixed will cost you £180 in interest charges in just one month – that’s £6 per day.

To rebuild your credit status, you need to show that you can manage a credit card in a responsible manner, and by making payments on time EVERY month then over time your credit score will gradually increase.

Paying the full statement balance each month is even better as you’ll improve your credit score without paying any interest charges in the process.

Guarantor loan

Another cost effective option is a guarantor loan with market leading provider Amigo, offering credit of between £500 and £5,000 at a representative APR of 49.9%.

To qualify for an Amigo loan you need to find a creditworthy friend or relative to act as guarantor for your loan. This means that if for some reason you are unable to pay, then the guarantor becomes liable for the outstanding balance.

Again the interest rate is a fraction of that charged by payday providers, plus it offers flexible terms, including the option to make additional ad hoc overpayments without a financial penalty. Amigo also feeds back your payment history to the credit reference agencies, so again paying on time every month is another step towards a healthy credit score.

Looking at the same example of borrowing £750 over 12 months, Amigo at 49.9% APR would cost you £77.29 per month and total interest charges of £177.48, much less of a drain on your bank account than the fast cash payday option.

If you’re looking for a larger guarantor loan you can borrow up to a maximum of £7,000 with glo at a rate of 49.5% APR

Finally, don’t forget your local credit union.

Although you’re unlikely to be able to borrow more than £1,000 until you’ve proved your ability to save, it’s another low cost avenue to explore if you’re shut out by mainstream banks.

Many credit union loans will cost you no more than 1% per month (12.7% APR) on the reducing balance of the loan.

To find a local credit union visit www.findyourcreditunion.co.uk and simply enter your home town and postcode details or alternatively give them a call on  0161 832 3694

If money is tight a payday loan could make matters worse in the long run, so always consider the smarter options first.

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