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A peer to peer loan could be an alternative way of borrowing cash if you cannot access mainstream credit cards or overdraft facilities. Generally, peer to peer lending is conducted online, and the peer to peer lending platform matches people in need of cash with people looking to invest their money. It is a form of borrowing for people with both good credit and bad credit. It is a formal and regulated service, and the two parties will never meet face to face, so it maintains the privacy element of online lending. There are other alternatives to consider to peer to peer lending with bad credit, including credit lines, short term loans and credit unions, which we will compare in this article.
A peer to peer loan can be considered a somewhat risky investment for the lender, as there is no guarantee they will get their money back. However it is also an investment which can turn over a relatively quick profit as the loan duration tends to be relatively short and the investor can often choose different levels of risk.
Peer to peer loans differ from normal loans mainly because an individual person, rather than a company, is acting as the lender. The transaction is conducted through a third party platform which matches the borrower with the investor and normally receives a commission for its services.
For unsecured borrowing, there are a range of options available, all of which will meet different borrowing needs:
Credit lines are a more recent credit product to join the market and have become a popular choice for people looking for bad credit loans. They first emerged between 2016 and 2019 and the product has become a more widely used form of credit since then. A credit line is a combination between a short term loan and a credit card. Credit lines are easy to access and allow for flexible repayments. Like a credit card, you will have a credit limit and you can make minimum payments if you are unable to repay your balance in full at the end of the month; and like a short term loan, the funds you withdraw are deposited directly into your bank account for you to use with your usual debit card.
A credit line means having access to credit on an ongoing basis, without having to submit an application each time you need to borrow. In this way, when an unexpected payment comes up or maybe an annual bill you had forgotten about comes through the letterbox, you can use your credit line to maintain your cashflow.
Overdrafts are a very common feature of most adult bank accounts. Usually, an overdraft limit is agreed prior to the bank account being opened, and then you can use your overdraft when the funds in your bank account run out. Typically, a low interest rate is charged for your borrowing. Some banks even grant a 0% interest rate for the first £250 making small arranged overdrafts a cheap way of borrowing. However, it is important to remember that although your overdraft is attached to your bank account, using your overdraft is still taking out credit, much like putting a purchase on a credit card. The funds are borrowed and you may be charged interest, so if you cannot afford to make the repayments then it is best not to borrow at all. If you find you are frequently in your overdraft and it is causing more issues than it is helping you manage your finances, then you can always request that your bank closes or reduces the facility altogether. Just because you have an overdraft, doesn’t mean you have to use it.
Almost everyone knows what a credit card is: it is a payment card that you can use to make purchases if you do not have the funds at the time. With credit cards, you can make a minimum payment each month if you cannot afford to repay the balance in full, although it is important to remember that only making the minimum payment will take you longer and cost you more to settle the balance. Plus, as you will only be able to borrow up to your credit limit, if you do not repay more than your minimum payment when you can afford to do so, you run the risk of reducing your access to credit when you really need it – for example, if an emergency expense arises. Credit cards also come with more consumer protections than normal debit cards so they can be useful for making large purchases like holidays, but only if you know you can afford to make the repayments.
Short term loans are a quick way of getting cash online and a popular choice for people looking for a loan with bad credit. You make an application, and if approved, the funds are transferred to your bank account almost instantly. You can generally borrow up to £1000 for any time between 1 day and 12 months, although typically a short term loan is borrowed for around 3 months. They are perceived to have a high interest rate because the APR is high, but as short term loans are rarely borrowed for a whole year, and you have to make instalment repayments throughout the borrowing term, the APR can be somewhat misleading. It is a good idea to use the lender’s online loan calculator to see how much your borrowing will actually cost you, and to work out if you can afford your repayments throughout the loan term.
Guarantor loans, a bit like short term loans, are easy to apply for but you need a relative or a friend to sign on as a guarantor to make the debt repayments if you fail to do so. They are generally used by people with a low credit score who are financially excluded from mainstream credit. While cashflow shortfalls are nothing to be ashamed of, it can be awkward asking friends or family for help. It is also worth noting that a lot of guarantor loan agreements will have an indemnity that means the guarantor can be primarily (as well as collaterally) pursued for the debt. This means they can ask the guarantor for repayment without first asking the borrower.
Private lending is an informal lending agreement usually between two friends or family members. This type of lending is not regulated and there is rarely a written agreement in place, although it is always a good idea to agree something in writing in case more serious action needs to be taken. Private lending usually does not accrue interest so it can be the cheapest way of borrowing a small amount of cash, but it involves a lot of trust and openness about your finances.
Credit unions are community run financial services that help you save money and on occasion provide loans from a few hundred pounds to potentially a mortgage. While credit unions are considered an alternative to high-cost credit, you have to be a member in order to access the benefits and not everyone is eligible. However, there are other alternatives to high-cost credit and credit unions that are available to people with a bad credit history.
A credit union is run by its members for its members. There are no shareholders and all of the money raised is put back into running the service and is shared among its members in the form of dividends. If you are eligible and you struggle with money, a credit union can help you manage your finances and work out a realistic and attainable budget to help you save and protect yourself against potential financial vulnerability.
While they are great for their members, not everyone is eligible to be part of a credit union. They are often run with a commonality such as location or profession. So, if there is not one in your area or your industry you might not be able to join one. Plus, credit unions tend to have limited resources which means they cannot process loan requests very quickly and, for some people, this delay might mean arrears or missed priority payments.
A credit union and a credit line are very different products so without knowing your specific circumstances or why you need to borrow money from time to time, it would be difficult (if not impossible) to advise on the best option out of the two.
A credit union can help educate you about your finances and advise you on responsible borrowing decisions. It can support you with a loan on occasion and you will earn a dividend just for saving money with them. A credit line on the other hand is simply a financial product to help manage your cashflow. There is no reason you cannot be part of a credit union and have a credit line as long as you are not borrowing more than you can afford from either.
Salary finance is quite a unique financing option. Rather than borrowing money, you access money you have already earned at an earlier date than your payday. Instead of borrowing from a lender, it is like borrowing from your future self.
Salary finance works to provide employees with an easier way to manage their money by making earned wages accessible at an earlier date. For example, if you have worked 10 days this month, you would be able to request 10 days’ worth of pay, instead of waiting until the end of the month or whenever your next payday is. A third party company typically runs salary finance schemes, and the employer may have to pay them a set-up fee as well as a pay-per-employee charge, although some salary advance schemes are free for employers. Usually, employees have to pay a transaction fee per advance withdrawal, but this tends to be between £1 and £2.
Unfortunately, salary finance has limited availability as not all employers offer the service. Plus, most people are accustomed to waiting until payday to make purchases and meet essential payments. This doesn’t mean wage advance schemes are useless – for some people it makes money management much easier. For example, if you have bills due on different days throughout the month, accessing your earned wages as you’ve earned them means you don’t need to stress about having the right money in your bank account at the right time. It can also improve money management as it requires you to be aware of your financial commitments in the future, because you don’t want to leave yourself with too little wages on your actual payday.
It would be difficult to draw up direct comparisons between the two financial services because they are so different. Instead, it is easier to look at which might suit you based on your circumstances. The biggest reason a cash credit line might be more popular than salary finance is simply that salary finance is not widely accessible yet, and credit lines provide a credit service to a wide demographic – including those with bad credit histories or low credit scores. Salary finance is only available from certain employers and so it is not a nationwide way to manage cashflow as yet.
You can apply for a credit line online within minutes and if you are approved, any funds you withdraw are transferred almost instantly. Credit lines charge interest for your borrowing, unlike salary finance, so it would cost more, but as the interest rates are relatively low, it is not typically a huge cost. If you borrowed £100 for 30 days with Polar Credit (Representative 68.7% APR (variable)), it will cost you £5.75 in interest and charges.
A credit line with Polar Credit works just like any other credit line but with added consideration for our customers. We actively work to reduce the cost of your borrowing to ensure your borrowing with us is sustainable, and to reward your customer loyalty. A credit line from Polar Credit is an alternative to consider instead of using peer to peer lending for bad credit. You can apply for a Polar Credit line online and, subject to approval, withdraw funds up to your credit limit as and when you need to. You will only be charged interest on the funds you have withdrawn and, if you cannot make your repayment in full one month, you can make a minimum payment instead so that you can manage your cashflow in a way that suits you best.
The representative APR on a Polar Credit line is 68.7% APR (variable) which is much lower than high-cost-short-term-credit options and as we actively try to reduce the cost of your borrowing, your interest rate will decrease over your borrowing lifetime. This means you can manage your finances effectively and be rewarded for borrowing responsibly.
A Polar Credit Line is a form of credit so you should only apply if you know you can afford the repayments and if you really need to borrow, because missing your repayments can cause you serious money problems and make credit harder to obtain in the future.
Whenever you consider your financial options, it is important to factor in your circumstances in the future, as well as in the present. While it may be tempting to use credit to pay for non-essential items, the credit or loan repayments on your next payday will result in you having less disposable income for the following month. Always review your budget and determine if you really need to borrow or if the purchase can wait a few more days.
Only you can truly know which type of credit is right and will help you manage your cashflow best. Some people use a variety of credit and some people just use one service. As long as you can make your repayments on time and you borrow responsibly, you are relatively free to choose whichever credit service you like. Just remember that any type of credit – even 0% interest rate credit cards and overdrafts – should never be treated like a secondary source of income. You need to budget for your repayments, and you should only really borrow when you need to, as committing yourself to too many financial responsibilities may increase the chances of missing repayments which can make credit harder to obtain in the future.
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