Payday loans are a very expensive way to borrow. Do not take out a payday loan until you’re sure you can repay it in full and on time. Otherwise, you could find yourself in a financial crisis.
How payday loans work
Payday loans were initially designed to provide short-term financial assistance until payday.
The money is deposited directly into your bank account. You repay the entire amount at the end each month with interest and other charges.
You are able to borrow more money – usually for three months but you can get longer loans.
These loans are often short-term, high-cost, and often very small in amount.
A payday loan can be costly and make your financial situation more difficult if you are unable to repay it on time. Be careful before you choose one.
What do payday loans cost you?
Did you know that?
An average annual percentage rate of interest (APR) for credit cards could reach 1,500% in a year. This compares to 22.8% APR on a standard credit card.
Payday loans are regulated by the Financial Conduct Authority (FCA).
The law caps the amount you can be charged for default fees and interest.
For a period of 30 days, a borrower will only pay PS24 in fees and charges for each PS100 borrowed. The maximum amount of default fees you can get is PS15 plus interest for not repaying your loan amount on time.
An overall cap will ensure that you never repay more than the original amount borrowed.
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Recurring payments
Payday lenders may ask you to set-up a recurring repayment (also called a continuous payment authority, or CPA) before you consent to a loan.
They will then be able to take the money directly from your bank account by using your debit card.
While this is a great option, it can also be dangerous. You might not have enough money to cover other bills, such mortgage payments or rent, as well as other essential expenses like heating or food. You could go over your overdraft limit and end up paying bank charges.
If you aren’t sure a CPA will provide you with enough control over your finances then ask the lender for other options.
Cancelling a CPA is possible at any moment. You will still have to repay the debt.
Other repayment options
Before you create a recurring repayment for a payday loan you need to be familiar with the other options available and how they work.
Direct Debit
Signing a Direct Debit Mandate gives you authority to authorize another party for money to be taken from your bank account. Direct Debit Guarantee Scheme provides protection for you in the event of an error. The amount of Direct Debit payments you receive can vary depending on the amount that is due.
Standing order
You sign a form that outlines the amounts and dates of the payments. Standing orders are not for Direct Debits. They can be set up to a fixed amount.
Avoid falling for the payday loan trap
A payday lender may offer an extension, known as a rollover or deferral, if you have difficulty repaying a payday loan.
Your lender may only offer two rollovers. You must be provided with an information sheet by your lender each time you are offered one. This will include details of debt assistance providers.
A payday loan rollover might sound like a great option if you have trouble repaying your existing loan. It can lead to serious problems, as you’ll be responsible for much more in interest and fees over the long term.
This could make it difficult to afford the essentials you want.
Are you looking to get a loan for payday?
Consider carefully how you will pay back a payday lender before taking out one.
Consider whether the interest and payment you have available next month is enough to make up for any money you might be short this month. Are you expecting extra income? Or will you have to make significant savings?
Consider whether you might prefer to repay your loan in installments.
You should verify that your payday lender is licensed by the Financial Conduct Authority.
The cooling-off period of 14 days
You may cancel your agreement at any point within the first 14-days if you change your mind.
Only the interest paid on credit that you have used is all you need to pay. You must get any additional charges refunded.