Understanding payday loans and knowing the alternatives
Spent your student loan and have 2 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 3,000 students to find out more about their money situation. This year, we learned in our National Student Money Survey that students experience an average £170 shortfall every month, as maintenance loans are no longer enough to cover rising living costs in the UK.
One option that students occasionally turn to for cash to fill the gap is payday loans. When the going gets really tough between loan instalments, this can seem like a reasonable option.
But while these types of lenders can offer cash in a flash, there are a whole slog of reasons 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?
A payday loan is a small, short-term loan that pretty much anyone can take out – no questions asked.
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 (hence the name).
This is why they're also often referred to as ‘cash advances' or ‘pay cheque advances'. As straightforward as this sounds, these sorts of loans are a lot more dangerous than they sound.
Payday loans can be tempting as they 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 the long-term impact of taking out this kind of credit, as well as the costs involved.
Student life undeniably comes with its periods of financial difficulty. But the sad truth is that more often than not, pay day loans will do the exact opposite of lending you a money-shaped helping hand, but only plunge you into deep and dangerous levels of debt.
And here's why…
Interest rates are crippling
The interest rates that come with payday loans are enough to make you weep. Pretty much all 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 because you're only borrowing the money for a short space of time, 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 – this is how they make money out of you!
The good news is that in 2015, the amount of interest that can be charged on a payday loan was capped at 0.8% per day, but this is still a lot.
Missing repayments could seriously cost you
Not only will you be forking out interest on your loan pretty much from 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, pay day 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!
They can damage your credit score
Even if you pay your loan back in a matter of a day, just the fact you took out a payday loan in the first place could prevent you from getting a mortgage later on in life.
These loans will appear on your credit report, and some mortgage lenders won't go near anyone who has taken out a payday loan, as it gives the impression you're not great at managing your cash.
Credit cards, on the other hand, can actually improve your credit score (if you use them responsibly – find out how).
They can take your money without your consent
When you sign up to a payday loan, they'll often ask you to sign up to Continuous Payment Authority (CPA) where you tell them the number on the front of your bank card.
Most won't inform you that signing up to this gives the lender the authority to take repayment money from your account any time they like.
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, but if they do take your money without you realising, this could cause problems when it messes up your monthly budget and you have other bills to pay.
They prey on the vulnerable
Think of it like this: if you're needing 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 then it's more than likely you will not be able to afford 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.
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 my 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.
We're pretty confident that with this list of alternatives to try, you'll never make it to the bottom!
Apply for Access to Learning Fund
It's surprising how many students aren't aware that this funding exists.
The Access to Learning Fund is provided independently by universities, so the amount of cash available depends on your university. The AFL is a hardship fund, created in order to support those students who are seriously struggling to support themselves at uni.
Each case is individually looked in to, so you will need to provide evidence of your financial situation and also prove you can manage your money responsibly to be considered.
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 18 months. If you're quite confident that your money troubles are relatively short term and you will 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 a good option for you.
Join a Credit Union
Credit Unions are non-profit money-lending organisations that are set up independently by a community.
Traditionally, that community would be something like living in the same neighbourhood, 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, which keeps rates low and allows those who would normally struggle to get accepted for bank loan 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' with its members. There are around 500 Credit Unions in the UK, and almost a million 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 help you out with this.
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 – it's likely they need that cash just as much as you do!
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.
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 – that's for sure!
The only issue that you may find is the bank's reluctance 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 100%).
Rethink is a charity who provide money advice for those affected by mental health problems, too.
At Save the Student, we would never advise anyone to take out payday loans or give into 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.
Are you struggling financially as a result of payday loan debt? Share your story in the comments below.