Last year, eight million loans, totalling £2billion, were agreed by high cost lenders and - “quick and easy” process costs can cause financial pain

It’s the most expensive time of the year for many Brits and with high street banks tough on who they will lend to many are forced to turn to a payday loan to help with the cost of christmas.

But that could turn into a financial disaster for struggling borrowers come 2014.

Last year eight million loans, totalling a scary £2billion, were agreed by high cost lenders and, while it may have seemed a “quick and easy” process to sign up, for some the spiralling costs have caused financial pain and misery.

Figures from the National Debtline are staggering and show the true cost and devastation of payday loans.

The debt charity is currently receiving calls from struggling payday borrowers at the rate of one every seven minutes and it expects the number of pleas for help to far exceed the 20,000 cases it handled in 2012.

The economy might be improving but for many families money remains tight, and just because your credit record isn’t great, it doesn’t mean that a payday loan is your only option.

With more than seven million people currently unable to borrow from banks because of a less than perfect credit score, we have checked out some cheaper loan options in a bid to help you avoid the financial heartache caused by high cost payday debt.

Credit unions

These local financial co-operatives are spread throughout the UK. They provide cheaper and fairer credit terms and aim to help people get back on track with their finances.

There are currently 380 credit unions in the UK helping more than one million members to manage their savings and borrowing.

They are a popular choice for people who have had credit issues in the past and find themselves unable to borrow from the mainstream lenders.

It’s also an area of low cost affordable credit that the Government is hoping will expand rapidly to help even more people without charging extortionate interest rates and fees.

Earlier this year, £38million worth of extra funding was agreed to grow the credit union industry to help an extra one million people on low incomes by 2019.

Credit unions encourage you to save money and help you to manage your money matters, but they also offer loans at affordable rates.

In some instances, loans will cost no more than 1% per month (12.7% APR) on the reducing balance.

Although you’re unlikely to be able to borrow too much from a credit union until you’ve proved your ability to save, it’s an excellent way to learn to get to grips with your finances.

Some credit unions also offer the Credit Union Current Account which comes with a Visa debit card with ATM access, or prepaid cards which can have savings or loans loaded onto them for you to use at ATMs and in shops in the usual way.

My Community Bank, an online credit union serving communities across the UK has just launched. The bank currently offers some attractive interest rates on savings and will shortly be offering loans at a rate of 26.8% APR – find out more at mycommunitybank.co.uk.

The credit union’s CUOK loan product offers short term loans of up to three months at 26.8% APR and has drawn more than 3,000 people away from the clutches of payday and doorstep lenders since its launch in February last year.

Find your nearest credit union at find yourcreditunion.co.uk or call 0161 832 3694.  

A guarantor loan

A less well known option is to borrow money with the help of a friend or relative acting as a guarantor.

This means that you borrow the money in your own name, but on the understanding that if you fail to make the repayments for some reason, then the guarantor will have to pay up instead.

Although the loan isn’t secured, the guarantor needs to have a good credit rating, be able to prove that they can afford the repayments in case the borrower doesn’t repay and be a UK homeowner.

You could argue that it would be cheaper for the guarantor to take a loan out in their own name, and of course some people will do this for friends and family, but other people want to stand on their own two feet and prove that given a second chance, they are capable of managing their own financial affairs.

Amigo Loans is currently one of the biggest providers in this market, lending to more than 65,000 personal and small business customers.

The interest rate charged is 49.9% APR, similar to the rates charged on credit repair cards listed earlier, but you can borrow more, in most cases between £500 and £5,000 .

It’s also another way to get your credit rating back on track as Amigo will report details of your repayments back to all the major credit reference agencies, including Experian, Equifax and Call Credit.