Ever find yourself in a situation where your finances just don't make it to the end of the month? If you've resorted to scraping coins out from under the couch cushions, then there's a good chance you'll consider applying for a payday loan. Because despite your careful budgeting, something unexpected like a car repair or doctor's bill pops up and you just need a little extra money to get you through to pay day. Payday loans offer a tempting solution for this kind of scenario and are the clear go-to solution, right?

Maybe not. Before opting for that quick win, consider the alternative which could provide benefits over time. The truth is that payday loans aren't the convenient and low-cost solutions that they often appear to be. Let's look at why.

What are payday loans?

Payday loans are short-term, unsecured(no security required) loans designed to give you quick access to money. These loans are usually repaid after a week or two, at which point the repayment amount is deducted from your bank account.

The cost of a payday loan

Because payday loans involve a small amount paid back soon after they're taken out, you can easily be fooled into thinking that a payday loan doesn't pose much of a risk. But the fees and interest rates associated with these loans are higher than almost any other type of loan, making them a very expensive solution. One that perhaps you can't afford to repay. You might think extensions offered by some lenders would be a relief, but a longer repayment period only means you'll pay a lot more in interest and fees.

It turns into a vicious circle of lending to pay the lender. Because of the high costs, a payday loan won't help you solve a cashflow problem, especially if you're already having financial difficulties. By taking out another loan, your expenses will just go up again, setting you up for another month of financial strain. In fact, your payday loan repayment could deplete the funds that you had put aside for another debit order. And a bounced debit order would almost certainly put a mark on your credit history, which will have a negative impact on your credit score, making future loans even more costly.

Are personal loans a better option when I need the money?

Personal loans come with longer repayment terms and lower interest rates, making them more affordable than payday loans, especially if you have a good credit score. Reputable and responsible lenders that offer personal loans often have more accurate credit scoring systems, meaning you pay an interest rate based on the risk you pose to the lending institution and not the risk posed by the average borrower, which in the case of payday loans is quite high.

Use our free online personal loan calculator to get an estimate of your monthly installment for the loan amount you need. 

Prevention is better than cure

Of course, it's better to not need a short-term loan in the first place, but that means making sure you always have enough money even when you’re faced with an emergency expense. And that's no easy task. Revising your budget can go a long way towards making funds available so that you can save for that emergency fund.

Keen to learn more?

Here are some quick links to useful articles that will help you budget and save.

7 Budgeting tips to help you save
How to create an emergency fund
Top financial and budgeting apps