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Payday loans have been in the news again, with the whole payday lending industry being told by the Office of Fair Trading to clean up their act or face losing their licenses. But are there alternatives to payday loans?

If you're considering taking out a payday loan, we have one word of advice - don't!

There are better alternatives to payday loans

But the truth is that many families feeling the pinch often feel they have no other option. (Or they get convinced by glitzy adverts that payday loans are actually a good idea).

So what are the facts behind payday loans? And what alternatives are out there?

Sky-high interest

The ugly truth is that payday loan companies prey on vulnerable people who don’t realise the incredibly high cost of this type of borrowing. Many payday lenders charge between 2,000 – 4,000% APR – a ridiculously high level of interest that leaves many customers unable to pay off the loan, leaving them with more money problems than when they started.

Credit rating at risk

We’ve been hearing on Twitter that payday loan company Wonga was emailing some of its customers before Christmas and implying that a payday loan could ‘do wonders’ for their credit rating.

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However in reality the opposite is true – many banks and lenders view the fact that you’ve taken out a payday loan as a negative thing, as it can be an indicator that a customer is struggling with their finances.

Everyone has a credit rating – it’s what banks and lenders use to decide whether to give you a particular loan, credit card or mortgage.

How good your credit rating is not only affects whether banks and companies will lend you money. It also affects the actual deal you are offered.

So if you want to get the best credit cards, loans, mortgage deals and mobile phone contracts – you need a good credit rating.

(You can check your credit rating for free here).

A controversial industry

Payday loan companies have long been controversial, with the Office of Fair Trading (OFT) criticising the industry over ‘aggressive’ debt collection practices.

David Fisher, director of consumer credit at the OFT, said: “We have uncovered evidence that some payday lenders are acting in ways that are so serious we have already opened formal investigations against them.

“I would urge anyone thinking about taking out a payday loan to make sure they fully understand the costs involved so they can be sure they can afford to repay it.”

Payday loan alternatives

If you’re really struggling with your finances, there are alternatives to payday lenders.

• Ask for an advance: your employer may be able to help by giving you an advance and taking it out of your next payslip. Or perhaps they can offer you overtime to help cover the gap in your finances?
• Get an authorised overdraft from your bank: arranging an overdraft with your bank in advance can be far more affordable than a payday loan, with interest charges typically around 11-20%.
• Join a Credit Union: Credit Unions are not-for-profit community organisations which offer savings and loans at very competitive rates of interest to their members. Find out if there’s a Credit Union near you.
• Make sure you’re getting what benefits you’re entitled to: every year billions of pounds worth of benefits go unclaimed – simply because people weren’t aware they qualified for them. You don’t need to be unemployed to be eligible: if you’re on a low income, care for someone, have kids, or have health issues you could be missing out. You can easily check what benefits you are entitled to using this clever online tool.
• Consider a Budgeting Loan: Budgeting Loans are interest-free loans from the government of between £100-£1,500. You need to have been on income-related benefits for at least 26 weeks to qualify. More info on Budgeting Loans here.
• Recycle your old stuff for cash: if you just need a couple of hundred quid, you’ll be surprised by how much you can make by selling old books, CDs, DVDs, clothes, ink cartridges – you name it! See 7 things you can recycle for cash. Also have a look at our ways to make money from home.
• Get free debt advice: we’ve got advice on how to get out of debt and how to cut the cost of borrowing. We've also got a useful free budget planner tool. If you need urgent money advice, there are some fantastic free services available that offer helplines and face-to-face help. See National Debtline, the Citizen’s Advice Bureau or StepChange.