The cheapest way to borrow money in an emergency

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.

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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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