Payday loans are short-term loans designed to offer small amounts of money (usually between £50 and £800) paid back over – typically – one or two months. They can give you cash for unexpected one-off expenses but they are a very expensive way to borrow. If you’re thinking about taking one out, here’s what you need to know.
How Payday Loans Work
Payday loan companies sell themselves on the basis that getting hold of a loan from them is quick and easy and they will consider your application even if you have a poor credit history.
Getting the Money
The loan is usually paid straight into your bank account, often within minutes of your application being approved.
Paying a Payday Loan Back
Normally you’ll be given up to a month to pay back the money you borrowed plus interest. Some lenders let you to choose the repayment period. The repayment, plus interest, is then taken directly from your bank account on the date you’ve agreed to pay back the loan.
However, payday lenders may make repeated attempts to take all or part of the amount owed if you pay through a ‘continuous payment authority’ or recurring payment and funds are not available in full on the due date.
What They Cost You
The average payday lender charges £25 interest for every £100 borrowed, if you pay it back within 28 days. That’s an APR of 1,737% (which shows the rate of interest you’d pay over a year and may include other charges). As a comparison, the average credit card would charge you £1.50 at an APR of 18%.
If you can’t pay back the loan on time, the fees and interest can soon mount up. You may have to pay a late payment fee of between £12 and £25 as well as interest.
The Problem with payday Loans
Payday loans can be easy to get, and if you have problems paying the loan back the lender may tempt you by offering an extension, known as a deferral or rollover.
This can seem like a great solution but the reality is payday loans are only manageable if used for short-term borrowing (30 days or less). By extending your loan you will have to pay more interest and possibly other fees. You could be left with an unmanageable debt as the costs can quickly increase.
You may also find it easy to get another payday loan from a different company at the same time (and use one to pay off another). This can lead to debts that grow very quickly, so it’s important that you avoid taking out more than one payday loan at a time.
If you cannot afford to repay your loan, the payday lender should freeze charges and interest no later than 60 days after your last payment.
However, any payments you miss may have a major effect on your credit rating and your ability to borrow in the future.
One Example When You Might Use a Payday Loan
In some extreme circumstances when you need money in a hurry, for example to pay an urgent car repair bill, a payday loan may be cheaper than going into an unauthorised overdraft on your bank account. But only if you can pay it back on time.
When You Shouldn’t Use a payday Loan
Payday loan companies advertise themselves as a solution to virtually every cash flow crisis you can think of. Some lenders recommend using a payday loan to pay for:
- nights out
- concert or sport tickets
- new clothes, or
- a treat, such as a weekend away
In reality, all you’re doing is paying a small fortune to borrow money for something you can’t afford.
Some payday lenders advertise that they don’t make credit checks, but they are required to by law, and they should also satisfy themselves that you are likely to be able to afford to repay in full on time. If you are unsure, don’t give your card details to the lender as they could be misused.
If you are struggling to repay existing debt and or stay on top of monthly bills, getting free, confidential expert advice will get your finances back on track. A free-to-use debt advice charity can negotiate with your creditors to give you time to repay your debts without you having to resort to borrowing more.
Where to Get Free Debt Advice
Facing up to debt can be a tough process. But there is lots of free, confidential help and advice available, so there’s no need to pay a debt management company to sort out your money worries.
Here is our selection of genuine sources of free, independent and confidential help.
- Citizens Advice
Citizens Advice provides free, independent and confidential advice.
- StepChange Debt Charity
StepChange Debt Charity is a registered charity that provides free and anonymous advice over the phone and online to over 350,000 people per year. They provide fee-free debt management plans and other debt solutions.
Get free expert debt advice from StepChange Debt Charity here
- Debt Advice
Debt Advice Foundation is a registered national debt advice charity offering free, confidential support and advice to anyone worried about loans, credit and debt. Expert advice is available via a free telephone helpline or online.
For information on debt solutions and tools to help with budgeting and debt, go to the Debt Advice Foundation website
- Christians Against Poverty
Christians Against Poverty (CAP) is a national debt counselling charity with 205 centres based in local churches across the UK.
Go to the self-help service on the Christians Against Poverty website
Payplan is an advice organisation that provides free, confidential and independent advice over the phone and online.
Visit Payplan website.
Shelter is a housing charity offering confidential advice on a range of financial issues.
Alternatives to Payday Loans
If you really need some money now, you should consider whether there are alternative forms of credit which would be less costly.
A much more affordable alternative is a loan from a credit union. There’s a cap on the amount of interest they can charge on their loans of 2% a month or 26.8% a year APR and there are no hidden charges or penalties if you repay the loan early.
- Borrowing from a credit union
- Using an authorised overdraft from your bank
- Increase your credit card limit
- Make use of all benefits you’re entitled to
- Get a loan from the government’s Social Fund
If You’re Going to Get a Payday Loan
Shop around as interest rates vary widely. Be wary of ‘special offers’ such as loan extensions and deferrals and only use payday loans for emergency short-term borrowing – don’t be tempted to roll the loan over for another month or take out another payday loan to pay for the original one.
Don’t just take our word for it. Read what consumer experts Which? Have to say about payday loans.
Are Payday Loans Regulated?
All lenders, whether they are a bank, a pawnbroker or as a payday loan lender, need to have a consumer credit licence from the Office of Fair Trading (OFT). That means they have to operate within certain rules.
If a lender is a member of the British Cheque and Credit Association or Consumer Finance Association, you complain to them in the first instance. If they are not a member or you want to take a complaint further you can also complain to the Financial Ombudsman Service.
Check your lender by searching the Office of Fair Trading’s Consumer Credit Register here.
Find out how to complain to the Financial Ombudsman Service on their website.
Even though payday loans are supposed to be short term, you have a 14-day cooling-off period. If you do change your mind, you’ll need to repay your loan plus the interest payment (and you have 30 days to do so), so you must be very sure you want to take out the loan.