What are the alternative options to short-term finance (including payday loans) in the UK? Leading British broker CashLady has posted a comprehensive summary of the alternative options available to UK consumers – you can read it by clicking on the link above.
The article is very in-depth and it comprehensively the advantages and disadvantages of personal finance products. There are many key takeaways from it which we’ve summarised here.
Credit cards and overdrafts offer flexibility but they can trap consumers
Arguably, the most flexible alternative options to short-term finance are:
- credit cards,
- bank overdrafts, and
- personal revolving credit facilities
The common factors they all share is that each consumer has a “limit” past which they can’t spend anymore and that, each month, interest must be paid on any amount left which is not repaid in full (sometimes called the “balance”).
A consumer can apply to have their “limit” at any time but there’s no guarantee that their financial institution will say yes.
And because there is no end date agreed in advance on which the facility will be settled, interest can accumulate over many years. That means that a consumer may be paying off a balance using the minimum repayments and it might take over a decade to pay off. That’s a decade’s worth of interest.
Loans requiring a form of security have dangers
You can also borrow money from financial institutions as long as you’re willing to put up something you will lose if you can’t keep up the repayments. These are called secured loans and they appear in many different forms in the UK:
- mortgage (secured on your home)
- second mortgage (secured on the equity in your home – equity is the difference between what your house is worth and the total amount of any mortgages secured against it)
- logbook loans (when you take out a logbook loan, ownership of your car passes to the logbook loan company straight away only to be transferred back to you when you’ve paid the loan off in full)
- pawnbrokers (when you secure a small and short-term loan against an item of jewellery or other item of worth which you lose if you don’t repay the loan in full)
Second mortgages and logbook loans are popular alternatives options to short-term credit. With them, you can generally lend larger sums of money over a longer period of time than with a short-term loan but there’s a risk that you might lose something of huge value to you and your family if you default on your loan.
Family and friends are always there but be careful
If you’re experiencing financial problems, you can always turn to family and friends. However, many long-lasting friendships and family relationships have come under intolerable strain because of money. If you are intent on borrowing money from friends or family, you should make sure you have enough to pay them back when you say that you will.
On the same subject, the number of “guarantor loan” companies in the UK is increasing, despite controversy surrounding them. With a guarantor loan, your guarantor promises to pay back the balance of a loan if you can’t keep up repayments. This is one of the more popular alternatives to short-term credit but borrowers run the same risk (if not greater) of ruining a prized relationship should things go wrong.
Banks and building societies only want people with the highest credit ratings
Banks and building societies generally only give loans or overdrafts to their own customers. Of all the alternative options to short-term credit, help from your bank or building society is a popular choice but you generally need to have a really good credit report to stand any chance of receiving a “yes” on your application.
Payday and short-term loan options for people with bad credit
What about short-term credit and payday loans themselves? They are not as popular as they once were although a million Brits still make use of them every year to cover emergency expenses. They are expensive but flexible – borrowers should also note that there are extra layers of Financial Conduct Authority-legislated protection on these types of loan too including a cap on interest rates and the total amount you have to pay back.
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