Payday loans can be a costly way to borrow money. Payday loans are expensive and should not be taken out unless you are certain that you will repay the loan on time.
Payday loans: How do they work?
Payday loans are short-term loans that were originally intended to help people get by until payday.
The money is transferred directly to your bank account and you pay the full amount with interest and any charges at the end.
You can now borrow for longer periods, usually three months, but longer loans are also available.
All these loans share one thing in common: they are expensive, short-term and often only for small amounts.
Payday loans are expensive and can make your financial situation worse if it isn’t paid back on time. Before you make a decision, it is important to do your research.
How much do payday loans cost?
Did you know?
The average annual percentage interest charge (APR), which is a credit card’s 22.8%, could rise to 1,500% over a year.
Payday loans are subject to the Financial Conduct Authority’s (FCA) rules.
The law restricts the amount of default and interest that can be charged.
A loan of 30 days is only possible for those who pay PS24 per PS100 borrowed. You can only be charged default fees of PS15 and interest if you fail to repay your loan on time.
A total cap is a limit that you won’t pay more than twice the amount you borrowed initially.
Are you seeing your household income shrink?
You may be facing higher living expenses but not enough money to cover them. Our guide, Living on a limited income, will help you find additional income sources and support that can help you manage your household costs and save money.
Recurring payments
Many payday lenders will require you to establish a recurring monthly payment before you agree to take out a loan. This is also known as a continuous payments authority (or CPA).
They can then take the amount you owe from your bank account using your debit card at the repayment date.
Although this can be very useful, it can also pose a risk. This could leave you without enough money to pay your mortgage, rent, or for essential purchases like heating and food. It could also cause you to go over your limit on overdrafts, which can lead to bank fees.
Ask the lender if they can assist you in any other way if you feel that a CPA won’t give you enough control of your finances.
A CPA can be cancelled at any time. However, you will still owe that debt and will have to repay it in another manner.
There are other repayment options
Make sure to understand your options and how they work before you make a recurring payday loan payment.
Direct Debit
You authorize another party to debit your bank account by signing a Direct Debit Mandate. Direct Debit Guarantee Scheme protects you in case of an error in the payment. Direct Debit payments may vary in amount depending on the amount due.
Standing order
Standing orders allow you to authorize your bank or building society make regular payments to another person by signing a form stating the amount and the dates. Standing orders, unlike Direct Debits are for a fixed amount.
Payday loans are not a trap
Payday lenders might offer you an extension if you are having trouble repaying your payday loan. This is called a rollover or deferral.
Your lender will only allow you to roll over two times. They must also give you an information sheet with details about free debt advice providers each time they offer one.
If you are having trouble repaying an existing loan, rolling over your payday loan may seem like a good solution. However, it can quickly cause problems as you will have to pay more interest and additional fees in the long-term.
You could find yourself struggling to pay for the essentials that you require.
You are about to apply for a payday loan
Think carefully about your repayment plan before you take out a payday loan.
Think about how much interest you will have next month if you are short on money. Are you expecting extra income? Are you expecting more income?
You might consider whether an instalment loan that you can repay over time is better for you.
Check that the Financial Conduct Authority (FCA) regulates any payday lender you are considering.
The cooling off period is 14 days
You can cancel the agreement anytime you wish, provided you do so within 14 days.
You only need to pay the interest you paid on your credit card. All additional charges must be refunded.