Firms like Lending Stream present their short-term loans as an alternative to payday loans. But are they really?
Payday loans have had a lot of negative press over the last year because of their sky-high interest rates and misleading adverts.
The idea behind them is to tide people over until their next pay cheque, but more often than not the people borrowing are not in a position to repay the loan in such a short time frame and get hit with excessive fees and charges.
Right now a million people take out a payday loan each month and with utility prices rising and high inflation it’s likely this number will rise.
Now, instead of payday loans, a new type of longer six-month loan has appeared. But is it just as risky?
The six-month loan
Companies such as Lending Stream advertise as a ‘more manageable alternative to payday loans’ and offer loans which can be paid back over six months.
Typically traditional payday loan companies such as Wonga require a loan to be repaid between 10 and 40 days, leaving the borrower with a very short window to find the funds to repay the debt. Lending Stream has a longer payback period.
You can still get the money quickly - within 10 minutes - but it’ll cost you £15.
Although Lending Stream may appear to be a more flexible lender, when I read the small print it all looked very familiar. Starting with a typical APR of 3,378.1%, this is a very expensive way to borrow cash.
The difference with this kind of loan company is you can choose how much you pay each month - for example £20 one month and £80 the next. However this doesn’t excuse the fact the interest rates are far higher than that of most standard personal loans and credit cards.
The whole point of short-term loans is supposed to be that they are there in case you need emergency cash, perhaps because your boiler has blown and you don't have savings to turn to. Sadly, according to the images used on the Lending Stream home page, acceptable reasons for going for a short-term loan include football costs and music festivals. Not exactly an emergency.
What other options are there?
When faced with the stringent loan market, payday loans do seem attractive, especially if there doesn’t seem any other way to meet your monthly bills.
However, there are still other options before taking out an expensive loan including peer-to-peer lending which allows borrowers to take out loans from other individuals.
Our article on the best alternatives lists all kinds of things you can do before resorting to these loans.
A loan from the high street banks
Taking out a personal loan from your bank is a much cheaper way of borrowing because the rates are far lower. A loan of £10,000 with Derbyshire BS for example has a typical APR of 5.6% while with Tesco Bank and Clydesdale Bank this is slightly higher at 5.7%.
However, the major problem here is these loans have a strict criteria and only certain borrowers, usually those with a good credit record, will be approved. Even when this has happened the process isn’t instant and can take a few weeks for the money to enter your bank account.
Another option for people who need a short-term cash supply is a credit card. There are balance transfer cards which mean you pay 0% interest on any debt on the card for a certain period of time and there are also 0% purchase cards, so you don’t pay interest on anything you buy on the card for many months.
These work well in theory and the rates are far lower than you’ll find in the short-term loan market, but again they only work if you’re able to pay the debt off in the given time, such as the 23 months with the Barclaycard Platinum Visa.
You also need to be approved for the card in the first place and as most cards with the lowest rates and longest 0% period are only reserved for those with a squeaky clean record, they're not an option for many.
One option if you’re left out by the main stream lenders is a credit builder card. Although the interest rate on these is high, typically around 29%, they work by helping you to improve your credit rating. However, to avoid the steep interest payments you need to make sure you clear the debt every month.
This is where short-term loans and payday loans find their market, people who may have been rejected elsewhere and in desperate need of help.
Free financial advice
If you’re in severe financial difficulty a charity such as the Consumer Credit Counselling Service (CCCS) is a good place to start.
It offers free advice and debt management plans and is worth speaking to before verging into any type of short-term loan.
For more places to find free support and advice, see Where to get free debt advice.
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