Payday loans can be expensive. You should never take out a loan for payday unless you are sure that you can pay it back on time.
How payday loans work
Payday loans, also known as payday loans, are short-term loans which were originally created to assist people until their next payday.
The money is directly transferred into your bank account. At the end of each month, you will repay it in full.
You can borrow more often – typically for 3 months. However, longer loans are possible.
The commonality of all these loans is that they are short-term, high cost and often for very small amounts.
Payday loans can be expensive and could worsen your situation if you don’t have the funds to pay them back on their due date. It is important that you think about your options before making a choice.
What are the costs of payday loans?
Did you know?
Over the course of a year, the average annual interest rate (APR), could be as high as 1,500%, compared to 22.8% for a typical credit score card.
The Financial Conduct Authority (FCA), has established rules that limit the cost of payday loans.
The law does not allow you to charge more than the maximum amount of interest or default fees.
An individual who takes out a loan for 30 consecutive days will not pay more than PS24 in fees or charges per PS100 of borrowed. In default fees, you will be charged PS15 plus interest if the loan is not repaid on time.
An overall limit means that you will never have to repay more than twice the amount of what you borrowed.
Is your household income decreasing?
If you are facing higher living costs but don’t have any extra income, you can find additional income sources or support to help manage your household expenses and save money in our guide Living with a tight income.
Recurring payments
A lot of payday lenders will request that you set up a regular payment before you accept a loan. Also known as a continuous pay authority or CPA,
They can take what you owe immediately from your bank account via your debitcard on the repayment date.
It can be useful but it can also be risky. It could not allow you to make other payments such as rent or mortgages, or pay for heating or other necessities. Bank charges could result if you go over your maximum overdraft.
If you do not feel a CPA will allow you sufficient control over your finances ask the lender if there are other ways they can help.
Cancelling a CPA can be done at any time. But, the debt will remain and you will need to repay it.
Other repayment options
Before setting up a recurring monthly payment for a payday advance, be sure you know what other options you have and how they work.
Direct Debit
When you sign a Direct Debit Mandate, it gives authority to another party collect money from your account. Direct Debit Guarantee Scheme covers you in the case of an error. Direct Debit payments can vary according to how much you owe.
Standing order
This is when your bank or building societies gives you authority to make regular payments. You must sign a form detailing the amounts and the dates. Standing orders can only be placed for a specific amount, and are different to Direct Debits.
Avoid the payday loan trap
If you have trouble repaying a payday advance, the payday lender may offer to extend your loan by offering a deferral or rolling over – or even another loan.
Your lender can only offer two rollovers. Each time they give you one, they will need to provide you with an informationsheet that includes details about debt counsel providers.
You might think that rolling over your payday loans is a great way to save money if you can’t repay the loan. This can quickly lead you to financial problems. You’ll need to pay much more interest and other fees for a longer time.
You may find it hard to pay for essentials.
Apply for a payday advance
You should think about how you are going to repay a payday advance before you apply for one.
You can think about the possibility of having both interest and the payment next month if your monthly income is low. Are you expecting extra income? Are you going to need to reduce your spending?
Consider whether it might be more beneficial for you to pay off your loan in monthly installments.
If you’re considering a payday loan, make sure the lender is registered with the Financial Conduct Authority.
The 14-day cooling period
You can change your mind at any time, and you can do so within 14 calendar days.
All you have to pay is interest for the credit you used. Any additional charges you have to pay must be refunded.
