Payday Loans – What to know

If you aren’t able to make your paycheque stretch over the whole month, payday loans may be able to help you make it to your next paycheque. But, while they are fairly flexible, they also come with high interest rates among other disadvantages.

Payday loans are short term, high cost loans that are designed to make sure people have enough money to last until payday.

It’s important to understand that Payday loans are seen by other lenders as a loan of last resort and a big red flag that someone might have financial problems. Consequently many lenders won’t grant loans or mortgages to people who have payday loans in the last 6 months.

The full amount of the loan is paid into your account. At the end of the loan term, often around a month, you have to repay the full amount of the loan, with the extra interest. But, it is becoming increasingly common to be able to borrow for up to three months and sometimes longer.

Remember, payday loans are a very expensive type of borrowing. If you’re not 100% sure you’ll be able to repay the loan at the end of the term, it may not be right for you.

What would payday loans cost you

Payday loans are capped by the Financial Conduct Authority (FCA). This means that the laws surrounding payday loans actually limit how much interest you can be charged, along with default fees.

Initial cost cap

Simply put, the original cost of the loan cannot exceed 0.8% of the loan value per day. This means that if you borrow £200 over 30 days, the maximum you could be charged is £1.60 per day. So, the total cost at the end of the 30 day term should be £48. But put that in context. After 4 months you will have paid nearly 100% in interest

Default fees

If you default on the loan, (meaning you don’t pay it back in time), there is also a maximum fee you can be charged. So the maximum a lender can charge you if you aren’t able to pay back the loan on time is £15. Additionally, after the lender has charged the default fee, they cannot increase the interest any higher than 0.8% per day.

Total cost cap

Finally, there is a cap on the total amount a payday loan can cost you. For the total cost cap, you will never have to pay back more than double what you borrow. So, if you borrow £200, you won’t have to pay back any more than £400. This is protection to ensure that lenders don’t get trapped by fast rising interest payments.

How to pay

Recurring payments

Before the loan is agreed, some lenders may ask you to set up recurring payments. This is also known as continuous payment authority, or CPA.

If a CPA is set up, it allows the lender to take exactly what they are owed straight from your account. While this may sound very convenient, it can also be very dangerous. This is because you might not be left with enough money in your account to pay for basic goods, such as food, electricity or water. Or, taking this money out without checking your balance could lead to you going over your spending limit, leading to more charges from your bank.

If you are unsure about using a CPA to repay your debt, ask your lender if there is an alternative method. 

It’s important to remember that you can cancel your CPA at any time. But, you will still owe the debt, so will need to find another way to repay it.

Direct Debit

A direct debit is a payment that you have authorised an organisation to collect from your bank or building society. You must have been given advance notice of the amount that will be paid, as well as the date.

Once the direct debit has been agreed, the money will automatically be taken from your account. If the organisation you’re paying wants to change the amount or date, they have to let you know first.

If something goes wrong with a direct debit payment, you are protected by the Direct Debit Guarantee Scheme.

Standing Order

A standing order is a set payment that has been arranged to be on a certain date.The main difference between a standing order and a direct debit is that the amount in a standing order cannot be changed.

Payday Loans Traps

If you’re struggling to repay the payday loan, lenders may offer you some very enticing looking deals. These often come in the form of an extension, also known as a rollover or a deferral. But, your lender can only offer a maximum of two rollovers, and each time they must give you details for free debt advice providers.

While rolling over may seem like a good idea, at the end of the loan you will have more interest payments to make. This means the loan could end up costing you a lot more, and may leave you much worse off.

Advertising Traps

Often, payday loan lenders advertise their loans as the ultimate fix-all solution. It’s important to remember that this is not the case. While payday loans certainly have their uses, they may not be right for you if:

• To want to pay off debts you already have
• You already have at least one payday loan
• You can’t guarantee that you’ll be able to pay the loan off
• You’re using it to buy non-essential goods such as new clothes or nights out
• You want to apply for conventional loans or mortgages

If you’re really struggling to make ends meet, you should contact a free debt advice provider first. They may be able to offer advice that could lead you in the right direction.

So you’re about to get a Payday Loan

If you’re still considering getting a payday loan, consider carefully how you’re going to pay it back. If you’re getting it to make it to the next paycheck, will you have the money to pay it back next month? Will you have to massively cut back? Is it going to have a massive effect on the rest of your life? You must consider whether it is really worth it.

Also, check to make sure the lender is regulated by the FCA, or maybe find out if a loan you have to repay in instalments is better for you.

14 days to change your mind

If you decide within the first 14 days that you don’t want a payday loan, you are able to back out of the agreement. You will have to repay all of the money, plus any interest earned on the credit you used in that time period. However, any extra charges will have to be refunded to you.

So, if you are expecting some extra cash, and need a loan to get you to that date, a payday loan could help you. But make sure you take into consideration that they have high interest rates, and could end up costing you a lot of money. As always, talking to those around you can help you decide if payday loans are right for you.