Money Insider: Consider Your Options Before Signing Up For A Payday Loan The independent

Banks, mortgage lenders, and credit card companies may offer attractive borrowing rates right now, but if you don’t have a near-perfect credit history, there’s a good chance your request be refused.

Consumers are bombarded with advertisements for payday loans, on TV, online, in newspapers and on main street billboards, so it’s no surprise that this is often the first port of call. if the bank says no.

But just because your credit history isn’t up to par, that doesn’t necessarily mean you have to turn to a payday lender and face crippling interest rates of up to 4.214 percent APR.

Although most traditional credit card companies will simply turn you down if your history shows that you missed a few credit payments or that a county court judgment was registered against you a few years ago, it there are credit cards that give you the chance to fix your credit report.

Luma’s credit cards, powered by Capital One, and Vanquis give some people who have had debt problems or have a limited credit history a real opportunity to turn things around.

Interest rates are a bit higher than standard credit cards, but are a fraction of those charged for short-term payday loans, with Vanquis charging a representative APR of 39.9% and Luma 35.9% .

The maximum credit limit available when you first apply is £ 1,000 with Vanquis and £ 1,500 with Luma.

To put the costs in perspective, borrowing £ 400 on a Vanquis credit card at 39.9% APR will cost you £ 13.55 in interest for a month, while the same amount borrowed from Wonga will cost you £ 125.48 d ‘interest and charges at a representative APR of 4,214 percent. If you borrowed £ 1,000 over 12 months on a Luma credit card at 35.9% APR it would cost you £ 100.41 per month and you would pay off a total of £ 1,204.92, interest charges of £ 204.92.

To rebuild your credit status, you must demonstrate a history of responsible credit card use. Therefore, if you use the card and make payments on time each month, your credit score will improve over time.

If you pay off the statement balance in full each month, that’s even better, as you’ll improve your credit score without paying interest charges in the process.

You won’t change your credit score overnight, but it is an opportunity to prove that you are financially responsible and, eventually, could give you the opportunity to borrow again at interest rates among. the lowest offered by banks and building societies.

Another more acceptable option is a relatively new provider called Amigo Loans offering credit of up to £ 5,000 at a representative APR of 49.9%.

To qualify for an Amigo loan, you must find a creditworthy friend or relative to vouch for your loan. This means that if for some reason you are unable to pay, the guarantor becomes liable for the outstanding balance. Again, the rate of interest is much cheaper than going the way of payday loans. Another avenue to explore is borrowing from a local credit union.

With over 400 credit unions across the UK and over a million members, these local financial cooperatives, owned by the people who use them, offer advice and help you try to manage your finances.

Credit unions will encourage you to save money, but they also offer loans at affordable rates. While you are unlikely to be able to borrow more than £ 1,000 until you prove your ability to save, this is a great way to manage your money for those who are excluded from borrowing from the big banks. . Some credit unions also offer the credit union checking account, which comes with a Visa debit card with ATM access, or prepaid cards that your savings or loans can be loaded onto for you to use in ATMs and in stores.

To find a local credit union visit or call 0161 832 3694.

Many credit union loans will cost you no more than 1 percent per month (12.7 percent APR) on the declining balance of the loan. If you borrowed £ 1,000 you would repay £ 88.15 per month over 12 months and the total repayable amount would be £ 1,066.20, with interest charges of just £ 66.20.

If your finances are tight, a high interest payday loan could land you in a much bigger financial mess, so only consider this if it is absolutely essential and as a last resort.

Andrew Hagger is an independent personal finance analyst at

Richard V. Johnson

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