If you were having a bad spell financially and urgently needed ?250 for a short period, where would you go?
In recent years, millions of people have turned to payday loans to help pay their rent or mortgage, deal with an unexpected emergency or even afford their weekly food shop.
But now Wonga has gone, and this week it emerged that the company’s biggest surviving rival faces a multimillion-pound bill after being hit with a deluge of complaints.
Payday lenders often argue they provide a vital service to those who would otherwise struggle to access credit – but some of those needing a quick shot of cash ily or friends, asking their employer for an advance, speaking to their bank about an overdraft or borrowing from a credit union.
Meanwhile, as the Money Advice Service points out, if you don’t have the cash you need until payday, a credit card can give you some extra wriggle room – but, of course, if you don’t clear your debt at the end of each month, you will usually have to pay interest on your outstanding balance, and that can really rack up.
Earlier this month, a short-term lender called Creditspring launched offering a novel concept: you pay a membership fee and get access to interest-free loans.
So if need to borrow that ?250 for a month, what are your choices, assuming that other options such as a handout from family or friends isn’t forthcoming? Be aware that these products all work in different ways so, strictly speaking, the results are not directly comparable.
An authorised overdraft These are designed for short-term borrowing, but costs vary hugely. Some banks have daily fees, some have monthly fees, some charge interest, and some use a combination of these.
Borrowing ?250 on an authorised overdraft over 31 days would cost a Barclays standard account holder ? (31 lots of 75p a day), while for a standard Halifax customer it is ? (a daily fee of 1p for every ?7 you borrow). With Nationwide’s FlexAccount it’s ?3.70 in interest.
Needless to say, going overdrawn without permission can be hideously costly. For example, in the above authorised scenario, TSB would charge ?9.31 (?3.31 interest and ?6 monthly usage fee) – but if it was unauthorised, it would be ?80 (TSB’s maximum monthly charge).
Credit unions These have long been touted as a vital alternative to payday lenders, and can offer a very good deal for people borrowing smaller amounts. The maximum they are allowed to charge is 3% a month on the reducing balance – an APR of 42.6%.
If you borrowed ?250 from London Mutual Credit Union for a month, you would pay back ? – that is, ?7.50 interest. If you borrowed ?250 for two months, you would pay back two lots of ? – that is, ? interest. At Leeds Credit Union it is a similar story: pay ?4.65 or ?7.50 for a ?250 loan for one month, or ?8.41 or ? over two months.
But anecdotal evidence suggests it is not always easy to quickly join a credit union and get cash fast: some will require you to build up some savings first. A report from debt charity StepChange said there were sometimes geographical or practical barriers to accessing credit unions, and added that between 50% and 80% of people asking to borrow from them are refused for not being creditworthy, depending on the individual organisation’s risk appetite.
Creditspring The lender went live this month and claims to offer a new way to deal with unexpected expenses. People pay a membership fee and can then borrow ?250 up to twice a year at 0% interest. Each ?250 advance is paid back in four monthly instalments of ?, along with a ?6 monthly fee. But that means the total cost of credit is ?72 (a representative APR of 87.4%, says the website). Some may feel that is a lot to shell out forjust ?250 or ?500. In addition, Creditspring is limited to those with an annual income of ?20,000-plus, and you have to be a member for 14 days before you can draw your first advance.
Payday lenders Wonga may now be an ex-lender, but there are plenty of other payday firms still plying for trade.
If you took out a ?250 loan for one month from QuickQuid, now arguably the UK’s biggest payday lender, it would charge ?60 interest – that is, the total you would repay is ?310. If you borrowed ?250 for two months, you would pay ?120 interest.
A number of other payday lenders would also charge ?60 for that ?250 for one month. Peachy said it would charge ?58.
Other lenders There are alternatives – social enterprises such as Fair Finance, which has several branches in London, doesn’t quite fit the above scenario as its minimum loan period is six months. Its website suggests someone borrowing ?250 over that period would pay about ?100 (made up of ?70 interest and an administration fee of ?30), giving a total to repay of ?350 (this assumes monthly repayments).
Its headline quoted representative APR is 109.6% and it concedes: “Our loans are more expensive than a loan from a bank or a credit union.”
Amigo allows applicants to borrow over one to five years at a representative APR of 49.9% even if they have a bad credit score, as long as they provide a guarantor. However, the minimum loan is ?500. Someone borrowing that over 12 months would repay ?.
Meanwhile, Oakam lets people borrow from ?200 to ?1,750 and pay it back over three to 12 months – so again, it doesn’t quite fit the scenario. If you borrowed ?250 over three months, you would repay ?. That’s a representative APR of 1,584.5%.