Money Insider: Find a cheaper alternative to payday loans

We are constantly bombarded by payday loan adverts, on television, online, in newspapers and on billboards, so it's no surprise so many have signed up for this high-cost credit. But just because your credit record isn't up to scratch, it doesn't mean you have to face crippling four-figure payday interest rates, there are cheaper alternatives.

Specialist credit cards

Mainstream credit card companies will decline you if your history shows that you have missed a couple of credit payments or have a county court judgment recorded against you from a few years back, but there are specialist credit cards that give you the chance to rebuild your credit record.

Cards from Luma, Aqua, and Vanquis offer a genuine opportunity for borrowers to prove their creditworthiness. The interest rates are higher than standard credit cards but still far cheaper than payday loans, with Vanquis charging a representative APR of 39.9 per cent and Luma and Aqua 35.9 per cent APR.

Borrowing £400 on a credit card at 39.9 per cent APR will cost £13.55 in interest for one month, whereas the same sum borrowed from Wonga will set you back more than nine times as much at £127.15 at an APR of 5,853 per cent.

If you borrowed £1,000 over 12 months on a credit card from Luma at 35.9 per cent APR it would cost you £100.41 a month and you would pay back a total of £1,204.92 – an interest charge of £204.92 in a year.

To rebuild credit status you need a history of using a credit card in a responsible way, so if you make payments on time EVERY month your credit score will gradually improve.

If you repay the statement balance in full each month, you help your credit score without paying any interest charges.

Guarantor loan

Another more palatable option is guarantor loan provider Amigo, offering credit of up to £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. If you are unable to pay, then the guarantor becomes liable for the outstanding balance.

Again the interest rate is far cheaper than going down the payday loans route, plus Amigo loans are flexible, so you can make additional ad hoc reductions without penalty.

Credit unions

There are more than 1 million members across 380 credit unions in the UK.

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 also offer loans at affordable rates. 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 idea if you're shut out by mainstream banks.

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 your savings or loans loaded onto them for you to use at ATMs and in shops.To find a local credit union visit www.findyourcreditunion.co.uk or phone 0161 832 3694.

Many credit union loans will cost you no more than 1 per cent a month (12.7 per cent APR) on the reducing balance of the loan. So if you borrow £1,000 you pay back £88.15 a month over 12 months. The total repayable would be £1,066.20 – an interest charge of just £66.20.

A high interest payday loan could land you in a financial mess, so consider it only as a last resort.

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