Understanding payday loans and knowing the alternatives
Spent your Student Loan and have two weeks before the next instalment? Here's why a payday loan won't solve your problem, and what you can do instead.
Every year we survey thousands of students to find out more about their money situation.
This year, we learned in our National Student Money Survey that students experience an average £223 shortfall every month and that 3% of you use payday or commercial loans as a way of making money.
When the going gets really tough between loan instalments, this can seem like a reasonable option – but there are a whole host of reasons why you shouldn't touch them with a fifty-foot barge pole.
And don't worry – we're not here to warn you off without doing the decent thing in offering you other options instead! We've got it all covered...
What's on this page?
What is a payday loan?
A payday loan is a short-term loan that pretty much anyone can take out – no questions asked. They're usually relatively small (a few hundred pounds, or less), but some lenders do offer loans into the thousands.
In theory, the concept is that the loan you take from these lenders will be repaid back once you've been paid at the end of the month. This is why they're also often referred to as 'cash advances' or 'pay cheque advances'.
However, as straightforward as this sounds, these sorts of loans are a lot more dangerous than they sound.
For starters, payday loans can offer an immediate influx of cash. Some lenders will even wire you cash within the hour, and all you have to do is send them a text!
Sounds tempting, we know, but it's really important to consider how dangerous it is to be able to borrow money this easily – let alone the long-term impact of taking out this kind of credit, and the costs involved with doing so.
To get a better idea of how dangerous payday loans can be, read our interview with Danny Cheetham – a one-time student who ended up in £26,000 of payday loan debt.
What are the dangers of payday loans?
The interest rates are crippling
The interest rates that come with payday loans are enough to make you weep. Several payday lenders charge APRs that are well into the 1,000% range (we're not even joking).
APR (Annual Percentage Rate) is the interest rate that you would pay over a year. While you might think that borrowing the money for a short space of time means you won't be charged much interest, this isn't the case.
The result of such high rates is that your interest could hit double figures in a very short time, and this is how they make money out of you!
The good news (ish) is that in 2015, payday loan interest rates were capped at 0.8% of the amount borrowed per day. What's more, the total cost of borrowing (fees and interest etc.) can no longer be any greater than the original amount borrowed.
We say "ish", as several payday loan providers still have an APR of well over 1,000% – significantly less than the previous amounts, which were often four or five times as much, but still disgustingly high.
Missing repayments could seriously cost you
Not only will you be forking out interest on your loan from pretty much the day you receive it, but you'll also be faced with other charges on top of this.
Keeping up with repayments is enough of a problem for people in full-time employment, let alone students who often don't have a regular monthly income.
Luckily, the FCA (Financial Conduct Authority) have enforced a late repayment fee cap at £15, meaning lenders won't be able to charge you anything above that each time you miss a payment.
However, with these sorts of charges, payday loans still work out as the most expensive option available – you could end up being charged more in a month than you would do in an entire year using a credit card!
Payday loans can damage your credit score
Even if you pay your loan back in a matter of days, the very fact you took out a payday loan in the first place could work against you getting a mortgage later on in life.
Payday lenders can take money from your account
When you sign up to a payday loan, they'll often ask you to sign up to Continuous Payment Authority (CPA).
However, what you might miss is that signing up to this gives the lender the authority to take repayment money from your account as and when it's due.
The law now states that they're only allowed to make two tries of taking your money if there's insufficient funds in your account.
They prey on the vulnerable
Think of it like this: if you need to take out a payday loan, it's likely you're struggling to budget effectively. And those who struggle to budget tend to also struggle to repay borrowed money on time.
If you're in enough financial trouble to consider taking one of these loans out in the first place, it's more than likely that you'll struggle to pay back interest rates such as these.
And the sad thing is that these companies rely on you not being able to make your repayments as one of their main revenue streams.
8 alternatives to payday loans
It's all very fine and well us rabbiting on about the danger of payday loans and why you should be avoiding them, but what most of you will be wanting to know is – what are your other options?
Well, the good news is, there are loads of alternatives for you to try. If you’re short of money, payday lenders should be at the very bottom of your list of options to try, and you should exhaust every other possibility before contacting them as a last resort.
Apply for funding from your uni
It's surprising how many students aren't aware that this funding exists.
UK universities used to offer something called the Access to Learning Fund, but officially this has been replaced. That said, a number of universities still offer it – some under the same name, others under something different.
However, the bottom line is that most unis will have some kind of hardship fund available to students who are struggling financially. Just search in the funding section on your uni's website, or speak to the student services/union.
Before you do, though, it's worth noting that these funds aren't infinite and your uni will only give support to students in serious need of help.
As such, you'll need to provide proof (like bank statements) that you haven't been spending all your money on PS4 games and other non-essentials.
Use your student overdraft
If you're a full-time student, make sure you're taking advantage of the perks that come with a student bank account – which includes a 0% overdraft of up to £3,000.
You'll never get an arranged overdraft this good again, so if you're struggling to make ends meet, now might be the time to switch accounts.
If you've already hit your limit but feel you could do with a small extension, you can try asking the bank (although nothing is guaranteed).
Get a 0% credit card
There are credit cards out there that allow you to borrow money at 0% for up to 24 months (if not longer).
If you're quite confident that your money troubles are relatively short term and that you'll be able to make repayments before the 18 months is up, then this is a much better option than a payday loan.
Unsure about credit cards? Read our student credit card guide to swot up before you decide if they're the right path for you.
Join a credit union
Credit unions are non-profit money-lending organisations that are set up independently by a community.
Traditionally the members of the union live in the same area, perhaps attending the same church or working in a certain industry, but nowadays communities tend to be a lot broader.
The idea is that by cutting out commercial money-lenders, money is kept within the financial community. This keeps rates low and allows those who would normally struggle to get accepted for bank loans to gain access to the support they need.
In order to take out a loan with a credit union, you need to have a 'common bond' – in other words, have something that links you to the members of the union. This could be a religious link, ancestral or anything that acts as the foundation for a credit union.
There are hundreds of credit unions in the UK, and hundreds of thousands of members, so in theory, you should be able to find one that will accept you!
Find out which credit union you could apply to by checking this website.
Ask your parents/friends
No one enjoys going to their parents with money woes, but let's be honest – it's unlikely they'll charge 500% interest, and you could do with a helping hand here.
We know asking for help can be difficult, which is why we've put together a guide to asking your parents for money.
If you feel comfortable with the idea and the loan isn't too much, you could also try asking a friend for some help. However, this comes with a disclaimer that you should only try this if you know for certain that you'll be able to repay your friend before an agreed deadline.
Don't put your friendship on the line if there's a chance you can't repay them – being owed money by a friend is just as awkward as owing them money, hence why we've got a guide to dealing with it.
Boost your bank balance
Rather than borrowing cash and getting yourself into more debt, why not look for other ways to make some quick cash to cover your costs?
Thanks to the beauty that is the world wide web, there are tonnes of ways you can earn some extra dollar online – we've listed 40 of our favourite ideas here, but we've got a ton of other money making guides on the site too.
Take out a bank loan
Bank loans should be a last resort as interest rates can still be steep, but they're certainly better value than a payday loan!
However, you may find the bank is reluctant to give you a loan in the first place as whether you're eligible very much depends on your credit rating.
It's also true that banks tend not to be so interested in smaller loans (as they won't make much money off them), so this might not be your best option.
Seek professional advice
If you're feeling really stuck in that you've exhausted every option on this list and still have no money coming in, we have one last suggestion: speak to a professional.
There are so many charities out there with staff who are trained to talk people out of difficult situations just like yours.
For example, StepChange (0800 138 1111) or the National Debtline (0808 808 4000) will be happy to run through your options and assess your individual case with you (and they'll respect your anonymity).
At Save the Student, we would never advise anyone to take out payday loans or give in to the temptations of instant credit. Our motto when it comes to financial products is: if it seems too good to be true, it probably is.
If you're struggling to keep track of your finances, check out our guide to making a budget and sticking to it.