Think of payday loans and quick, snappy adverts come to mind.
However, despite the slick marketing campaigns payday loans have always been considered to be controversial.
They often come with high interest rates, high late payment charges and short repayment terms that can all have a long-term negative impact your finances.
What is a payday loan and how does it work?
A payday loan is a short-term loan that is designed to tide you over until your next payday. They typically last for two weeks.Payday loans are short term loans designed to provide immediate financial relief.
The idea is that the loan repayment should be made before you get your next wage.
Advertised as quick and convenient by payday lenders it’s important never to forget that a payday loan comes at a cost.
The unsecured loan often comes with high interest, high APRs and hidden charges by the lender.
More often than not payday lending is the cause of people’s debt problem rather than the saviour. That’s why you should never take on payday loan debt unless you know you’ll be able to pay it back in full on time
However, this advertised convenience and ease comes with a cost.
Payday loans typically come with high-interest rates and often exceptionally high APRs.
You should never take a payday loan unless you know you will be able to repay the loan in full and on time.
The concept of a payday loan is simple. They are designed to offer support if you experience an unexpected cost from one payday to the next.
You borrow money from a payday loan lender and the money is paid directly into your account. You will be expected to repay the entity of the payday loan debt – including interest and additional charges – at the end of the month.
Payday loans come with high interest and charges attached, making falling into a never ending payday loan trap easier than you’d think.
Although you may only borrow a small amount, you should always be cautious when considering turning to payday lender. A payday loan could make your situation worse and lead to financial hardship if you’re unable to repay what you owe in time and in full.
The cost of payday loans have been capped by the Financial Conduct Authority (FCA).
It means that payday lenders are no longer able to charge high fees that could stop you from paying more than twice what you borrowed in the first place.
If you take out a 30-day loan you won’t pay more than £24 in fees and charges for every £100 borrowed.
The cap also applies the money you repay – the most you’ll be charged is £15 plus interest on the amount borrowed.
Your credit rating won’t be damaged by a payday loan, permitting you repay the original loan in full and on time.
If you get a payday loan and don’t have enough money to make the monthly payments you will default and face the consequences of that.
However, according to credit reference agency Experian, there may be some exceptions to this rule.
Your credit file is a record of all of the debt you have borrowed, how long you are paying it for and your payment history. Lenders use this as a way of deciding your creditworthiness before lending you any money.
If a particular company views payday loan debt negatively – perhaps because they believe payday loan borrowers are less reliable – then having one on your credit history could go against you.
It’s also important to remember that any loan application, no matter the loan amount, can temporarily lower your credit rating due to the hard search and a new credit account being added to your file.
While payday loans might seem like a fast solution to an urgent problem, it’s always best to avoid them if possible.
There are risks associated with payday loans so it’s important to consider this before committing.
It’s no secret that payday loan lenders are known for charging sky high interest rates. If you don’t stay on top if what you owe you could also face additional charges and fees. This can mean paying more money than your original loan.
Thankfully, new regulation means that costs have been brought down slightly, with interest capped at 0.8% per day and will mean that you won’t pay more than double what you borrowed.
Payday loans are advertised as being a quick fix.
They’re designed to offer financial support when you’re faced with an unexpected expense, such as a broken boiler.
With that in mind, you’re more often than not expected to repay payday lenders your full loan amount by your next payday.
The short repayment schedule may not seem like an issue at first, however, if you’re already stretched financially that month and haven’t planned the extra money into your budget then it’s easy to miss the tight deadline.
When you apply for a payday loan the lender will often ask you to give access to your bank account. Not simply a direct debit, many payday lenders may take additional money from your bank or card issuer.
Payments like this are often to cover the cost of fees hidden in the small print of the loan agreement.
You should also be aware that your bank accounts may also be shared with a number of companies who might also attempt to take hidden fees from your account.
It was literally the best decision of my life, and it has actually changed my life, cheesy as that sounds, it has changed my life.
Paige , IVA Customer
While payday loans might seem like a fast solution to an urgent problem, it’s always best to avoid them if possible.
Payday loan debt comes with risks that far outweigh the benefits of going through another lender.
If you’re not able to save money for a month or borrow from friends and family, you may consider low interest personal loans from a credit union or another reputable lender.
Payday loans can have long lasting damage on your finances – especially on your credit rating if you’re unable to stay to your repayment plan.
It’s also important to remember, if the payday loan lender hasn’t broken the terms of your contract, your chances of having any debt forgiven are slim and could result in enforcement action.
With that in mind, it’s always best to avoid payday loans entirely.
If you’re struggling to pay for a payday loan or are having hidden fees taken from your bank account by the payday lender it’s important to seek professional debt advice as soon as possible.
Your Debt Expert specialises in providing debt help to people struggling with payday loan debt and our team can help you find a debt solution to stop pressure to pay what you can’t afford.
With their help you could freeze interest charges and reduce what you owe to one affordable monthly payment.
To find out more about how you can manage payday loan debt without borrowing money, talk to Your Debt Expert on 0800 082 8086.
Advisors will discuss all possible debt solutions available depending on where you live in the UK. Advice is tailored to individual circumstances and can only be offered following an initial fact-finding process. Third party fees may apply. Free and impartial information also available at moneyhelper.org.uk. If you choose to enter a solution that offers the opportunity to write off a percentage of unsecured debts included, the percentage may vary. The example provided has been achieved by 10% of IVA customers in the last 12 months.
Your Debt Expert is a trading style of Carrington Dean Group Limited.
Carrington Dean Group Limited is authorised and registered by the Financial Conduct Authority (FCA), registration number 674395. Registered in Scotland with company number SC225672 at Regent House, 5th Floor, 76 Renfield Street, Glasgow, G2 1NQ. Information Commissioner’s Office number ZA351745.
If you live in Scotland:
Carrington Dean Group Limited
Company number: SC225672
Registered address: Regent House, 5th Floor, 76 Renfield Street, Glasgow, G2 1NQ
FCA number: 674395
ICO number: ZA351745
If you live in England, Wales or Northern Ireland:
UK Debt Expert Limited
Company number: SC382881
Registered address: Regent House, 5th Floor, 76 Renfield Street, Glasgow, G2 1NQ
FCA number: 688071
ICO number: ZB590053