Emergency money lending – where to turn when you need cash

Apart from the obvious one for those still blessed with the option of the ‘Bank of Mum and Dad’, who do you turn to for a quick, short-term loan?

Payday loan companies thrive on high interest rates and huge APRs, but some people love them.  Personally, I think I’d be put off by being charged an effective interest rate of 458% for borrowing £200 for a couple of weeks when my car broke down, but that’s not the case for everyone.

Even the Office of Fair Trading has just finished looking into the payday loan market and has concluded that the market works ‘well’ and that there is no need to put caps on the charges involved.

I personally don’t entirely agree with this.  It is true that the charges are made clear – if you look on the website of say Wonga and you will see just how much you will be charged for however much you borrow.  The total you will repay is clearly stated, as is the typical APR – 2689%.  So that’s all good, honest and above board.  If you need money in real hurry – and are able to pay it back before things slip away from you – it’s a straightforward way to borrow money.

However, if you aren’t absolutely desperate; it’s a totally mad way to borrow money!  Wait for things until you have the money put away for them is the most responsible way of spending.  This is not always the most practical though is it?  What about when the car breaks down, for example.  What are the alternatives?

Credit cards, authorised overdrafts all have a part to play.  Some more than others depending on your arrangements with your bank.  Starting with the latter, authorised overdrafts have an average interest rate of around 13-14% (with the exception of banks like the Halifax Bank of Scotland and Lloyds, which is soon to introduce a monthly fee).  Admittedly, unauthorised overdrafts, or going over your overdraft limit, can cost you much, much more and may even make the payday loan a more reasonable option.

And so to credit cards.  If you have the right card, you can easily borrow £200 for 20 days at not cost at all.  If you pay your bills off in full every month, you shouldn’t have to pay any interest on most credit cards.  If you need money for more than 30 days, you can still find some cards offering 0% rates on new spending for the first 12 months of holding them.  The downside to a 0% card is that after 12 months your deal will run out and you’ll want, or need, to move on.  In that case, you may find a low APR card, which you won’t need to change after 12 months, more interesting and easier.  One that I know of has an APR of 6.9% – which in the context of short-term loan rates sounds good to me!  Just make sure that you don’t use one to withdraw cash to pay the garage with – otherwise there will be an instant fee, 2.075% in the case of this particular card, and then a rate of 27.95% from withdrawal until you pay it back – no interest-free period.  It is, however, still around a tenth of what you’d pay with a payday loan.

Even the credit cards aimed at those with bad credit are still a ‘cheaper’ option.  The Aqua card for example.  It charges an APR of 35.9%, but no interest is charged if you pay in full by the payment date, and it is still less than payday loan rates.

Remember, there are choices, even during a recession.  So, before undertaking any kind of loan or credit card, there are two things that you absolutely must do.

  1.       Shop around and,
  2.       do your sums!
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