Payday loans are short term loans for small amounts of money, usually available on the high street and online. They were originally meant to help tide people over until they next get paid, but the extremely high interest rates attached can often result in borrowers falling into problem debt.

Here, we look at payday loans in more detail; what they are, why people use them, and what to do if you need help with mounting debt.

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What is a payday loan?

Payday loans are a form of loan that allows you to borrow a small amount of money quickly, and repay later at a high rate of interest. They’re normally used to cover short term gaps in income – they’re called payday loans because they were designed as a bridge between paydays.

They can be applied for very quickly in comparison with other ways to borrow. A payday lender will usually only ask for basic information, will process a high number of applications quickly, and will approve the vast majority of loan applications – unlike lenders that are more strictly authorised and regulated.

Payday loans have long been a topic of debate. They’re a risky, quick-fix form of lending that’s widely advertised, highly accessible, and can make it all too easy for vulnerable people to borrow money they have no realistic chance of paying back.

How do payday loans work?

A person struggling with their finances can secure a loan by applying to a payday lender. Payday lenders usually require minimal information, often just bank card details and some standard personal information. Unlike conventional lenders like credit card providers, payday lenders don’t tend to ask about credit scores.

Once an application is accepted, the payday loan goes straight into the borrower’s bank account. Because these loans tend to involve small amounts of money, you’re usually required to repay what you owe at the end of the month – plus interest and charges.

The amount of interest attached to a payday loan can be up to 1,500%, or 50 times more interest than conventional credit cards. That’s without considering the fees and charges added if you don’t have enough money to settle your debt at the end of the month.

How much do payday loans cost?

The amount a payday loan costs is now regulated by the Financial Conduct Authority (FCA), as a means of putting a stop to the money problems and spiraling debt associated with this kind of loan.

According to the FCA, lenders must charge you a maximum of:

  • 0.8% interest per day
  • £15 (plus interest on the amount you borrowed) for a defaulted payment
  • A 100% total cost cap (meaning borrowers will never have to pay more in interest and fees alone than the amount they borrowed on the first place)

While the FCA’s solutions have helped halt soaring debt, there are still a huge number of people who rely on these short term money fixes to help them get through the month.

Should I take a payday loan?

In most cases, industry experts recommend against taking on this kind of debt. If you need some form of loan to pay your immediate outgoings, you should make sure you have exhausted all other options first. Payday loans are only a financial stopgap, and shouldn’t be confused with a long term debt solution.

If you do opt to take one out, it’s essential that you pay it back promptly to avoid charges and prevent interest mounting up. Used sensibly, it can be a useful source of money to tide you over in an emergency. Used recklessly, it’s a recipe for disaster.

How do people fall into payday loan debt?

A payday loan can seem like a good idea when you’re strapped for cash and your next wage is further away than you’d like. But if you can’t keep on top of repayments, fees and extremely high interest makes it an easy way to rack up debts you can’t control.

Below are some of the most common ways people go from payday lending to problem debt.

Interest rates

Payday lenders are well known for charging the highest interest rates possible. Not only that, but if you can’t pay back the loan in the agreed time, the lender is likely to pile on extra fees and penalties.

Thankfully, with new laws in place to control unruly loan companies, these costs have been brought down slightly. Interest rates on payday loans have now been capped at 0.8% per day and the borrower will never pay more than double the amount they borrow.

Short repayment periods

Although there are some companies who will give you a few months to repay your payday loan, these are usually an exception to the rule. Normally, you will need to pay back the loan in full at the end of the month – or when you next get paid.

It’s often the small print that catches people out when it comes to these short term loans, and it isn’t always easy to meet the deadlines given. It can become a cycle of needing more loans to pay off the ones you already have, and not keeping up with your payments will lead to being charged fees and penalties that only exacerbate your problems.

Direct access to your bank account

When you apply for a payday loan online, you’ll often be asked to give the company access to your account for payments. It’s advertised as the most convenient way for the lender to take back what they’re owed, but gives them direct access to your funds and can leave you short at the end of the month if you don’t keep an eye on outgoings.

How can I clear my payday loan debt?

As mentioned above, the most common way to repay a payday loan is to allow the lender to take a regular payment from your bank account via a direct debit. This is known as a Continuous Payment Authority (CPA).

When you set up a Continuous Payment Authority with a lender, they will take a payment towards what you owe directly from your account – usually on an agreed upon day. Just because a CPA is the most common method to clear a the debt, however, doesn’t mean it’s the best.

While a CPA may seem handy at the time, it comes with its own dangers. Before you agree to one, you should always make sure you have enough in your account to cover all your outgoings should a CPA come off unexpectedly.

A common complaint when setting up a CPA is the lender taking small payments from an account when they aren’t due, leaving the borrower with no money on their debit card.

Can I dispute a payday loan debt?

If you feel you are being treated unfairly by your provider, there are actions you can take. You have the right to make a complaint, or pass your complaint on to the Financial Ombudsman Service.

The Financial Ombudsman is the authority that settles complaints between consumers and financial services companies. The website is a useful resource, with plenty of helpful content in this area. Not only can you get free debt advice, the ombudsman has the power to reprimand loan companies who are taking advantage of people.

What happens if you can't pay your payday loan?

If you’re struggling to pay back a short term loan, the first thing to note is you’re not alone. Thousands of people across the UK have found themselves at the mercy of a payday lender. The best way to deal with the problem is to attack it head on – by contacting the lender in question.

If you reach out to the company who provided the loan, they’re obliged by law to direct you to a debt charity or another organisation that will off you free, confidential debt advice. An example of that kind of debt charity would be StepChange, the UK’s biggest debt charity, who specialise in free debt advice and support.

In the event that you are unable to come to an arrangement with the lender, there are companies that offer formal debt solutions.

Not only will you get free debt advice, they can walk you through debt solutions that will allow you to consolidate multiple debts to a single payment, and you may even be able to write-off any payday loan debts you can’t afford to repay.

How do I get support with payday loan debt?

At IVA Plan, we’d always advise avoiding payday loans. It’s far better to explore other, less risky options first, like tightening your belt for a month, or borrowing from a close friend or family member.

Payday loans can cause significant damage to your finances and wreak havoc on your credit score if you lose control of repayments.

If you’ve found yourself in over your head with a payday loan company and you need help or advice, give us a call today on. Our friendly advisers are on hand to help work through your debt problems and are trained to give you the best advice for your situation.