The cheapest way to borrow money in an emergency

By MoneyWeek editor-in-chief Merryn Somerset Webb Jun 29, 2010

Merryn Somerset-Webb

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How happy would you be if you'd borrowed £200 for a couple of weeks to get your boiler fixed, and then found that you'd been charged an effective interest rate of 458%?

Not very happy, would be my guess. But that's not how Olly Stock told the Independent he felt when he did just that with payday loan company Speed-e-loans. Instead, he felt that the charges were "clear and reasonable". He says he "would definitely use the service again." Gosh.

Still, Stock isn't alone in thinking that there is nothing wrong with the payday loan market. The Office of Fair Trading has just finished looking into it and concluded that the market works "well" and that there is no need to impose caps on the charges. 

Why you should avoid payday lenders

We've looked at the payday loan market before and I'm not entirely sure we agree.

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It is absolutely true that the charges demanded by the sector are clear. Look on the website of say Wonga or Speed-e-loans and you'll be left in no doubt about how much your borrowings will cost you.

Wonga has a great little graphic that allows you to put in exactly how much you want to borrow for how many days. It then tells you immediately what this will cost you. Put in £200 for 20 days and you will be told that you'll repay the capital plus £46.04 in interest and fees. The total is clearly stated and you are also told in pretty big letters that the typical APR is 2689%.

That's all good – the one thing I love about this industry is its honesty. And if you need money in a desperate hurry – and you are going to be able to pay it back before things get out of control – it's a straightforward way to borrow money.

However, if you aren't in any way desperate, it is a totally insane way to borrow money. Stock says that he doesn't often borrow money. He just waits until he has money before he buys things. That's very responsible.

But he should still have a credit card. Why? Because even if he isn't going to use it on a regular basis (and I am not suggesting he does), if he has a good one, he can use it to save himself some money next time his boiler breaks down.

Authorised overdrafts are cheaper than payday loans

The payday loan companies make great play from the fact that an overdraft can cost more than a payday loan. And, if the overdraft in question is unauthorised, that is almost certainly true. The average interest rate on an unauthorised overdraft is around 19.7%, but the charges are a killer.

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Go over your overdraft limit with the Halifax and you'll get charged £5 a day. You can argue about the rights and wrongs of this. But nonetheless that would mean that going over by £200 for 20 days would cost you not £46.04, but a shocking £100 – going on double what Wonga would charge.

However, it certainly isn't true of most authorised overdrafts – if you avoid the likes of the Halifax Bank of Scotland, which charge daily fees, and Lloyds, which is soon to start charging a monthly fee, the average interest rate on these is around 13-14%.

How to get a 0% short-term loan

And it isn't true of the usual villain in the personal finance world – the credit card. Get the right card and you can easily borrow £200 for 20 days at no cost at all. If you pay your bills off in full every month, you shouldn't have to pay any interest at all on most credit cards. And if you need to borrow money for more than 30 days, you can still find several 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 to move on. That adds up to boring admin, which is why you might want to go for a low APR card instead.

The Halifax Easy Rate Mastercard comes with an APR of 6.9% which, in the great scheme of loan rates, sounds pretty good to me. It certainly makes their credit cards a lot better value than their bank accounts.

Just make sure that you don't use one to withdraw cash to pay your boiler man: do so and you'll pay an instant 2.075% fee and then a rate of 27.95% from the second the cash hits your hand until you pay it back – there is no interest-free period at all. On the plus side that still adds up to around a tenth of what you'd pay with a payday loan…

The same is true of credit cards aimed at those with bad credit. Take the Aqua card. Designed for those who "might have trouble getting credit from other companies," it charges an APR of 35.9%. That's high. But as with most cards, no interest is charged if you pay in full by the payment date, and it still represents a massive saving over payday loan rates.

There is a suggestion that the average payday loan customer is somehow "financially excluded" and therefore unable to get a credit card or other kind of loan. But if the industry's own PR is anything to go by, that just isn't so. Speed-e-loan claims that its customers have an average salary of £21,000. That's well into credit card approval territory, even these days. So why are the likes of Mr Stock paying 400% plus for short term loans when they could be paying 0%?

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Comments (11)

Published in Personal finance | More articles by Merryn Somerset Webb

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  • 1. Andy

    (29 June 2010, 04:18PM)  Complain about this comment

    The most common cause of going into debt is unexpected expenses, ie. the boiler breaking down. The importance of a monthly income/expenditure balance sheet cant be overstated. A common mistake is not to allow for annual, quaterly or unexpected bills. Add all possible liabilities, hols,Xmas, home insurenace, emergencies and divide them accordingly to reach a monthly sum and make sure you put it aside. "Enveloping" is one way to keep this sum aside for rainy days or renewals. Set up a seperate instant access account, with interest and use a monthly standing order to fund it. Accept it will get run down its not for retirement! That way you have power to avoid the "credit industry" much easier.

  • 2. Mark

    (29 June 2010, 11:04PM)  Complain about this comment

    I bank with First Direct , which gives me a £250 overdraft per account (I have 3), only if I pass this will I be charged. I can juggle these by internet to get a useful sum for emergencies.

  • 3. JB

    (30 June 2010, 10:56AM)  Complain about this comment

    You have to have pretty good credit in order to get a 0% - 6% credit card. A luxury not everyone has available to them.

  • 4. Jim

    (01 July 2010, 08:18AM)  Complain about this comment

    Reckon Andy at 1 is well organised, I think I am as well.

    But he should consider that not everyone is like him or me.

    Otherwise we would not have people like Olly Stock around to give us shock and awe and keep us amused, as well as being a useful anecdote for financial foolishess.

  • 5. alex

    (01 July 2010, 10:48AM)  Complain about this comment

    If Mr Stock is like alot of people I know, he's using payday loans because he's already maxxed out his credit card limit and is struggling to service the interest only mortgage on a flat he paid £200,000 for in 2007 inthe belief that it would soon be worth £250,000 and solve all of his financial problems.....

  • 6. Sabastian Miller

    (16 July 2010, 10:52AM)  Complain about this comment

    I don’t think they’re entirely evil as many only have this option available to them. many who use payday loans are people who can barely afford to eat,

  • 7. ronaldeddy

    (26 July 2010, 02:21PM)  Complain about this comment

    Payday Loan, requirements remain unchanged forever. You have to go through them to complete the necessary application, and, Advance Payday Loan, then their presentation.

  • 8. CKP

    (04 August 2010, 09:06PM)  Complain about this comment

    The FSA should make these high street loan sharks make their victims ..er..customers take and pass a basic maths test before being allowed to take one of these loans - they should also be advised to attend the citizens advice bureau first. The problem is the generally poor standard of numeracy and literacy in the UK, thanks to a failed education system. And to think that the sun once never set on the British Empire, now those in many of the former colonies are far better educated (in an education system modelled on the old British one).

  • 9. julia

    (07 August 2010, 11:06AM)  Complain about this comment

    Social lending platforms like Zopa and YES-secure in the UK are also a handy alternatives to folks who are outside the purview of traditional lending sources. Its a concept that is fast catching up in the unsecured loan space. Very simply put, its a ebay like money lending model where lenders bid on a borrower's loan request and those with the lowest bid get to fund the loan. The borrower gets the loan on much lower rates than banks and the lenders get decent returns on their investment as well as the satisfaction of helping someone in need. To top it all, its quick, easy and online! For details, check out www.yes-secure.com

  • 10. Emily Morgan

    (03 October 2011, 06:40AM)  Complain about this comment

    In fact, I don't consider payday loans so bad in case of emergency. They can be actually helpful when you need to get some cash sooner rather than later. The main point is to be careful and attentive when signing the agreement. Don't be afraid to ask questions concerning the fees and interest rates. Besides, you can use financial calculators to estimate the total amount you will have to repay. I use this service from time to time and always manage to pay off the payday loans without delays.

  • 11. Melany Smith

    (26 November 2011, 09:03AM)  Complain about this comment

    Further to the above article I would like to reassure our customers, potential customers and stakeholders that we are providing a solution for many people who can't otherwise access instant cash at particular times. Our company, both in the UK and internationally has witnessed growth for many years despite economic climates. I would like to take this opportunity to advise our customers that we do not see our stores as benefiting from their personal situations, but instead we offer an honest and responsible product that millions of people across the UK rely, depend and benefit on.
    Melany from http://britainloans.co.uk/

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