Money Insider: How to avoid the clutches of payday lenders

A low credit score doesn't mean a payday loan is your only option. Despite ongoing threats of a clampdown on high-cost consumer credit, we are still bombarded by payday loan adverts.

The message the Government should be shouting from the rooftops is that just because your credit record isn't perfect, you don't have to face crippling four-figure payday rates. The powers that be need to let people know there are a number of cheaper and credible alternatives.

Specialist credit cards

Mainstream providers will turn you down flat if your record shows you've missed a couple of payments or have a County Court Judgment against you, even if it's from a few years back, but there are specialist credit cards that give you the chance to rebuild your record. Cards from Luma, Aqua, Capital One and Tesco Bank offer a genuine opportunity for borrowers to prove their creditworthiness.

The interest rates are higher than for standard credit cards but far cheaper than payday loans, with Tesco Bank charging a representative APR of 28.9 per cent on its new Foundation Credit Card whilst Luma and Aqua both advertise 35.9 per cent APR.

For example, borrowing £400 on a credit card at 28.9 per cent APR will cost you £9.63 in interest for one month, whereas the same sum borrowed from Wonga will set you back more than 13 times as much at £127.15 at a representative APR of 5,853 per cent.

If you borrowed £1,000 over 12 months from Luma at 35.9 per cent APR, your repayments would be £100.41 a month and you'd pay back £1,204.92 – i.e. an interest charge of £204.92 in a year.

To rebuild your credit status, you need to demonstrate a history of using a credit card in a responsible manner, so if you use the card and make payments on time every month then, over time, your credit score will improve.

Guarantor loan

Another cost-effective option is a guarantor loan with respected provider Amigo, offering credit of between £500 and £5,000 at a representative APR of 49.9 per cent.

To qualify for an Amigo loan, you need a creditworthy friend or relative to act as guarantor for your loan. This means that if for some reason you are unable to pay, the guarantor becomes liable for the outstanding balance.

The interest rate is far cheaper than a payday loan, plus Amigo loans offer flexible terms, including the option to make additional ad hoc overpayments without a penalty.

Credit Unions

There are more than 1 million members in 380 credit unions. These local financial co-operatives, owned by the people who use them, offer guidance and help you try to regain control of your finances.

They will encourage you to save money, but they also offer loans at affordable rates too.

Although you're unlikely to be able to borrow more than £1,000 until you've proved your ability to save, it's an excellent way to manage your money if you're shut out by mainstream banks.

Some credit unions also offer a current account that comes with a Visa debit card with ATM access, or prepaid cards that can have your savings or loans loaded on to them for you to use at ATMs and in shops in the usual way. To find a local credit union, visit www.findyourcreditunion.co.uk or call 0161 832 3694.

Many credit union loans will cost you no more than 1 per cent per month (12.7 per cent APR) on the reducing balance of the loan.

If your finances are already squeezed a high interest payday loan could land you in a much bigger financial mess, so look at the more affordable options first.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk