Alternatives to payday loans

If you need to borrow money and are thinking of getting a payday loan, stop to consider your options. Although this seems like the easy to set up option, a payday loan can quickly turn into a problem debt for many people. It can also affect your credit rating if you don't pay it back on time.

Borrowing to pay for everyday essentials

A payday loan is almost certainly not the answer if you need the money to:

  • Pay household bills
  • Pay your rent or a mortgage
  • Paying back people you owe money
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If you're struggling to pay for the essentials it's advisable to speak to a debt adviser.

They can help you work out a budget, prioritise your debts, talk to everyone you owe money to and help set up a repayment plan.

There are lots of organisations that can help with free, confidential debt advice. There's no need to spend money paying a debt management company to help you sort out your money worries as mentioned above there are many charities and schemes to help in these situations that are totally free.

Non-essential spending

Payday loan companies might advertise payday loans for things like nights out, new clothes or other treats. This is not a good idea when it comes to looking at reasons to take out a payday loan.

You will end up paying back much more than you borrowed if you go down this route. If you really just can't wait, there are far cheaper ways to borrow.

It's important to find out where your money goes each month. A simple method is to:

  • Create a budget planner - List all outgoings v's incoming's
  • Keep a spending diary - Great for tracking your spending patterns
  • Make savings - Energy bills, insurances and transport costs are just a few areas you can look at to make instant savings.

Alternative borrowing

Ask for a pay advance

If you need money before payday, check with your employer and ask if they'll give you an advance on your wages.

If you're claiming benefits and waiting for your first payment, or if your money is late you can ask your Jobcentre Plus adviser for a short-term advance. This would normally need to be paid back out of your benefit payments.

Family and friends

Borrowing emergency money from a family member or a friend can help you avoid the risks that go with payday loans.

But do make sure that both you and the person you're borrowing from take the time to:

  • Put your agreement in writing
  • Work out a budget and a repayment plan
  • Discuss what will happen if you're late paying it back or don't repay it at all

These simple rules should avoid falling out with those closest to you, as both parties understand the arrangement of the loan.

Credit card

If you've got a credit card, you could consider using it for purchases - or even cash withdrawals, but only if you really have to, as they can be expensive.

Make sure you pay back as much as you can each month, to keep costs down, and don't be tempted to spend more than you can comfortably afford to repay.

There are credit cards especially for people with a poor credit rating, for example because of previous defaults or County Court Judgments (CCJs).

They charge a much higher rate of interest than other cards but so long as you repay all or most of the balance each month they will still be cheaper than a payday loan. As always, be careful with your repayments as the interest charges and missed payment charges can soon add up.

Although you might not be able to manage to repay the balance on your card each month, it's still likely to be far cheaper than a payday loan - but try to pay off as much as you can.

Authorised overdrafts

If you have a current account you might be able to get an authorised overdraft from your bank.

These can be fairly expensive (although there are some interest-free overdrafts) but it will usually be cheaper than using a payday loan - as long as you stay within the overdraft limit.

Avoid using an unauthorised overdraft, as this can be very expensive and lead to serious money problems.

Community Development Finance Institutions (CDFIs)

Community Development Finance Institutions are organisations that provide loans and support to those who find it hard to access finance from mainstream sources.

Businesses may find it hard to raise finance for many reasons. They may have a poor credit rating or history, they can offer little or no collateral, or they may have an insufficient track record or operate in an undeserved or deprived community.

Community Development Finance Institutions provide finance to businesses, social enterprises and individuals who:

  • Are unable to access mainstream finance from high street banks and elsewhere.
  • Operate in deprived communities.
  • Are owned by entrepreneurs from disadvantaged communities.

CDFIs focus on the businesses that are hardest-to-reach:

  • Start-ups
  • Sole traders
  • Informal and unincorporated ventures
  • Microenterprises employing fewer than ten peoples

Many businesses, especially start-ups and sole traders, but even established microenterprises, have little or no collateral to secure a loan. This reduces their chances of accessing funds from banks. CDFIs recognise this and many make unsecured loans.

More than creating jobs, their objective is also to generate social, environmental and economic returns. In doing so, they are very much social enterprises, supporting the local economies that need help the most.


The Community Development Finance Association (CDFA) represents the national network of Community Development Finance Institutions. Its goal is to support a thriving community finance industry that brings social and financial benefits to neighbourhoods across the UK.

To do this, the CDFA:

  • Engages with the Government on behalf of CDFIs and the communities they serve
  • Runs a range of events and networking opportunities
  • Offers members advice, information and consultancy when they need it

Borrowing from a credit union

A much more affordable alternative to a payday loan is a loan from a credit union.

There's a cap on the amount of interest they can charge, which is 3% a month or 42.6% a year APR for England, Scotland and Wales, 1% a month or 26.8% APR for Northern Ireland.

Social Fund loan

If you desperately need to borrow money and you're claiming benefits, you might be able to apply for an interest-free Budgeting Loan from the Social Fund.

Welfare assistance schemes

If you're struggling to pay for essentials like food, heating and clothes you might be able to get help from a local welfare assistance scheme.

They vary from area to area and can provide, for example, vouchers, pre-payment cards, furniture or white goods and food banks.


With so many alternatives, payday loans should be the last choice for short-term credit. While each of these alternatives has certain challenges such as lack of sufficient funding or requirement of a good credit score, it is worthwhile to explore each option in detail before taking a payday loan.

As a result of the government capping the interest rate payable on payday loans from 2015 this has helped stem the ridiculous charges levied by these types of loan companies. This move provided some relief to borrowers of payday loans.