Ae you planning on making an expensive one-off purchase?
Do you need some quick cash to cover you until the end of the month?
Or maybe you are searching for a way to reduce your debt burden and consolidate your debts?
Credit cards, overdrafts and payday loans are several ways borrowers can apply for when they don’t have money in their bank accounts.
However, credit cards aren’t for everyone – there are some great deals out there for borrowers, yet those with an adverse credit history will be unable to apply.
Plus, overdrafts are now more expensive than loans themselves.
So, the only remaining option could be a payday loan, and yet this is only for small amounts and should never be considered for an expensive, larger or long-term purchase.
So before you begin applying for these traditional forms of credit, why not consider these 6 credit alternatives as they might be a better fit for your finances.
1. Borrowing from Friends & Family (the most awkward)
So, let us get this one out of the way first.
It can be easy to ask family or friends to borrow money from, yet many Brits hate borrowing money from friends and family.
Family members lending money to one another can provide emergency funding and help you avoid forms of acquiring credit with very high interest rates, like overdrafts and loans.
Hopefully, borrowing a loan from a family member will be interest-free, and provided that if you fail to repay it will not harm the family relationship – this is the best option.
For those who borrow from friends, be aware that if they don’t repay, this will probably end the friendship.
2. Credit Unions
A common reason people borrow money from their family and friends is that they are unable to obtain credit due to poor credit history. Rather than take a high-interest payday loan to cover an emergency expense (payday loans should never be considered for long-term borrowing), those seeking credit could try a credit union.
Credit unions are not-for-profit organisations normally serving a particular community. The Bank of England compiled a list of authorised credit unions here.
Managed by and for their members; credit unions provide low-cost loans to each member. However, borrowers should only seek credit if they can afford the repayments.
3. Prepaid Cards
If you need to make a purchase on a card yet do not want to apply for a credit card, or you want to use a card abroad, a prepaid credit card can be a sensible option. Prepaid cards don’t permit holders to spend past the amount that they have loaded onto the card, so it’s impossible to accrue debt, unlike a credit card where it can be tempting to spend more than needed.
Several prepaid card providers offer various promotional perks including cash back or discounts to make their products more appealing. Some prepaid cards may charge a fee for opening the card, and the majority do charge ATM withdrawal fees, especially for cash withdrawals abroad.
One critical note to be aware of is that prepaid cards don’t contain the same consumer protection as a credit card would, meaning that customers may not be able to get their money back should a purchase be made fraudulently on their card, as you would expect with a credit card.
Using a prepaid card abroad can provide some piece of mind as should the card be lost or stolen, it can be blocked immediately, and as it is not linked to your bank account, your balance is safe and sound.
4. Peer to Peer Consumer Lending
Peer to peer lending is growing as an alternative to bank loans and overdrafts. This type of borrowing is very similar to borrowing from a bank yet instead you borrow from other individuals who lend you money as they wish to make more money on their savings. Savers are getting little from banks in interest rates so lending that money to borrowers is a better way of increasing their savings growth.
Peer to peer consumer lending is growing, according to Statista, in 2014 a total value of £547 million was lent to consumers by P2P (peer to peer) companies. By 2018, this has risen to over £10 billion pounds!
Borrowers are matched with lenders through an online service or company like Zopa that checks borrowers for suitability. Credit checks and risk assessments are still part of the equation as any personal loan so for those with an adverse credit history this may not be for them.
What is different is that the interest rates vary and are considerably much cheaper than those offered by banks, especially on smaller amounts for shorter periods. Most bank loans only offer low-interest rates on higher borrowed amounts. As with any loan, if the borrower defaults on their repayments, their credit score will take a hammering, and additional charges and fees will be added to the original loan amount.
5. PayPal Credit
PayPal customers can apply for PayPal Credit online, are assessed using PayPal’s proprietary credit scoring method, and if approved, are given a credit limit indicative on their score.
Then borrowers can then make purchases on their credit limit anywhere that accepts PayPal.
For purchases above £150, PayPal Credit has 0% interest for the first four months. After four months the interest rate moves to their standard 17.9% rate. For those purchases below £150 will be charged a representative interest rate of 17.9%, so this option should only be considered for larger purchases.
One positive about PayPal Credit is that each time a borrower spends £150 or more (within their credit limit), they will get in 0% interest for the four months, every time!
So, unlike credit cards who withdraw their promotional rates, PayPal credit does not.
Obviously, make sure you pay off the debt within four months; otherwise, this will negate any point of the interest-free purchase.
6. Budgeting Loan (for those on low-household incomes)
If you’re already getting certain benefits and desperately need credit, then lower-income households could apply for an interest-free Budgeting Loan. Budgeting Loans are much cheaper than paying high-interest charges for borrowing from traditional banks or payday loan lenders.
A Budgeting Loan is designed to aid households to pay for essential or unexpected expenses if they are on a low income. Budgeting Loans can be used for new furniture to travel expenses or even additional costs from having a new baby or a sudden death in the family (funeral costs).
Applicants can apply for a Budgeting Loan if you’re getting one of the following benefits:
- Pension Credit
- Income Support
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance
Applicants must be claiming one of the benefits for at least six consecutive months and not have had a break for more than 28 days.
The minimum loan amount borrowers can request for is £100. Note though, if applicants have savings over £1,000 this could impact their likelihood of acceptance as it is implied that they should use this first.
Viable credit alternatives for UK households
Searching for a credit alternative to bank loans, overdrafts and credit cards is not as difficult as it seems.
These three common credit options are the most widely known and hence, are always considered the first option for individuals and households to consider when seeking credit.
However, borrowers should consider these six credit alternatives as they not only are cheaper and will cost you less in the long-term, they also have greater flexibility as to what, when and where they can be used. So, the next time you’re seeking credit for a new purchase, consider borrowing from friends and family, credit unions, prepaid cards, peer to peer lending, PayPal credit or a budgeting loan.
What’s your favorite credit alternative?