27/11/2013 07:12 GMT | Updated 26/01/2014 05:59 GMT

Have You Danced With the Devil? The Real Alternatives to Payday Loans


Apart from maybe the big six energy companies, I don't know any type of business which gets more bad press than payday loan companies. Anyone you speak to - in the pub, on the school run or in the office - has an extremely negative view of them, yet as much as £1.8 billion is being lent a year by payday loan companies and some (yes you Wonga!) have interest rates as high as 5,853% APR. Disgraceful! The StepChange debt charity says that the average owed to payday loan firms is £1657 per person, but the average monthly income of that person is £1379. It is no wonder people are getting into such trouble with payday loan companies.

An official study in 2010 said that pay loans legitimately filled a gap in the market and were useful when used responsibly. However, by 2013, the Office of Fair Trading was accusing them of widespread irresponsible lending. They were becoming part of everyday life and some families were using them simply to put food on the table.

Finally the Treasury has seen sense and agreed that while these type of loans are not going away, they need to be made better (understatement of the century!). It is at least a step in the right direction. Details have yet to be announced but the good news is that payday loans will now be capped meaning that the total cost of the loan (including fee and interest rates) won't be able to reach stupidly high heights. This has to be excellent news, as it has been in Australia where rates are capped at 4% per month after an upfront fee of a maximum of 20%. However, that is in the future. What about people in need today?

There are around 240 payday loan firms in the UK, many of which spring up around Christmas. We are bombarded by images of happy people having fun on colourful festive billboards and even on kids TV channels! It should not be allowed! A staggering 1.2 million people are considering payday loans to help with their yuletide spend. They simply make your situation worse leaving you with debts that quickly become unmanageable.

So what are the other options? Unfortunately, payday loans are the quickest way to get emergency cash (which is clearly what makes them attractive) but there are alternatives to emergency borrowing. You can read more details on each of these in my 1 minute guide to emergency borrowing

1. Friends and family - interest free loans are always the best option. Just make sure you set up a payment plan that you stick to, as you want to keep hold of your friends!

2. For students, universities might have hardship funds and emergency loans so that you don't have to turn to payday loans

3. Check out whether you can cheaply extend your overdraft. Speaking to your bank before you get into debt is always the best option. If your account doesn't have a good overdraft facility, switch!

4. Credit unions are good for people who might have been turned down for credit in the past. They are not for profit organisations and offer small loans where the interest cannot go above 26.8%

5. A personal loan is really for larger amounts as it is cheapest when you are borrowing over £5,000, but with interest rates of less than 10%, it could be a viable option

6. Credit cards are often the root cause of debt, but if you use them correctly, they can help you solve your financial problems. If you want to consolidate debt, then use a 0% balance transfer credit card to slash your monthly payments

Or you can always borrow from yourself! Pop £10 or £20 a month on to a prepaid card and you'll soon have a useful wad of cash for when you desperately need it.