Due to the lack of borrowing regulations, there have been many cases of people falling into a debt trap due to payday loan interest rates.
Even after the Financial Conduct Authority (FCA) imposed a cap in 2015, the the annual interest rates for these loans average 1,250 percent.
One of the biggest players in the industry, Wonga, disappeared after being paralyzed by compensation claims, as has Salary day. Yet you’ll still find endless cash offers that can be approved in minutes, with the Annual Percentage of Interest (APR) buried in the fine print.
People who resort to these expensive ways of borrowing money usually have bad credit or find it difficult to lend because they have no credit history.
So what can you do when your bills arrive before your paycheck? Here we take a look at the alternatives:
1. “Get paid as you go” salary system
Wagestream is a new idea. It allows workers to access their own pay as they earn it rather than waiting for the paycheck at the end of the month.
Regardless of how much they withdraw, employees have to pay a flat fee of £ 1.75, which is deducted from their salary along with the amount withdrawn.
The fees are the same whether they take £ 50 or £ 500, and there is no interest.
Employers must agree to sign up for the app, which is licensed by the FCA and has financial backing from Amazon and Microsoft founders – Jeff Bezos and Bill Gates.
Launched in January 2018, the startup launched a pilot program with more than 20 UK companies and now has 50 on board, including Hackney Council and Camden Town Brewery, and is used by around 115,000 workers.
“It’s perfect for unforeseen expenses”
Georgie Clayman, 26, HR manager at Camden City Brewery
Working in HR, I was part of the team that introduced Wagestream to the brewery last year, and I use it myself as an employee.
It is very convenient for unforeseen expenses like a parking fine. It was nice to be able to pay the fine quickly enough to get a discount.
I also used it to spend money on vacation in Australia. And when concert tickets went on sale for soul singer Leon Bridges. I wanted to see him for so long but didn’t have the money to buy the tickets.
I had a credit card but had some issues with it and it’s now wiped out so I don’t trust myself to have one.
Wagestream lets you get paid when you need it and don’t have to wait. This means that I have avoided having to take out a loan and pay interest.
It is a responsible thing to offer as an employer. The company can set the limit that workers can take as a percentage of their salary; we have it at 30%.
It puts power in the hands of employees, who sometimes feel embarrassed to address their boss to ask for an advance.
The app is fantastic and very user-friendly. The sliding scale of how much you can transfer is great and it shows you how much you have left available.
2. Get a 0% credit card, even with a bad credit score
Even if you have a bad credit rating, there are still options. There are usually a few offers available, and you won’t get that long with the 0% offer, but they still last much longer than a payday loan.
If you have a good credit rating, go for the longest contract. Keep in mind that these cards punish you severely after the 0% period is over – the interest you will be charged usually goes up to over 25%.
So it’s crucial that you try to pay them off before it starts (although it’s still probably cheaper than payday loans).
If you need the loan to buy something, just get the card and then use it for the purchase. If you need the loan for cash, don’t take any money out – it won’t be 0% and there will be a charge.
Instead, get a 0% card and then use it for your normal spending, trying to budget. You will notice that the equivalent amount of unspent income will accumulate in your bank account, which can then be used as cash.
Applications take between one and three weeks.
3. Credit unions
Credit unions are a fast growing alternative to banks, building societies, and home / payday lenders. There are over 400 in the UK that offer a range of savings accounts, checking accounts and loans.
A form of cooperative, they are non-profit. Credit unions offer loans to members only. You can only join a credit union if you meet its eligibility criteria.
In addition to offering larger loans, they can lend smaller amounts than a bank or mortgage company, closer to amounts loaned by a payday lender.
Interest rates vary, but are capped by law at 42.6% APR, which is considerably less than many short-term loans, including a payday loan.
Credit unions are authorized and regulated by the FCA, which means that they are also covered by the Financial Services Compensation Scheme (FSCS).
4. Community Development Finance Institutions (CDFI)
CDFIs are social enterprises that provide loans to those who have difficulty accessing financing from traditional lenders.
Responsible Finance, the representative body, has 70 members, nine of whom offer personal loans. While most to lend only to businesses, they increased last year to 45,900 personal loans for a total of £ 26million.
About 23,230 of these loans were made to people who had previously borrowed from a high-cost institution lender.
For more information and a directory of Responsible Finance members, visit here.
5. Budgeting of government loans and advances
If you have received certain benefits – income support, pension credit, employment and support allowance, or jobseeker’s allowance – in the past six months, you may be able to get an interest-free loan of up to up to £ 812 for emergency assistance or one-time essentials.
It can help pay for furniture or household items, clothes or shoes, rent in advance, moving expenses, maternity expenses, and funeral expenses, among others.
If you are currently applying for universal credit, you can apply for a Budget advance instead of.
Repayments depend on what you can afford, although loans last for a maximum of two years.
Apply online at Gov.uk or pick one up at your nearest Jobcentre Plus.
6. Emergency funding for your board
In certain situations, you can contact the local social assistance scheme in your municipality. These plans are generally available for low income people who are facing financial hardship.
Each local authority manages its own program with different eligibility criteria. Some offer small cash loans or grants, food stamps or free used furniture.
Unfortunately, this is a postal code lottery. In England, contact your Local council to know its procedure. If you live in Scotland you can apply for a Scottish Social Protection Fund. If you live in Wales this is the Discretionary Assistance Fund. If you live in Northern Ireland you can try Financial support.