Traditionally, payday loans are short term, high-interest loans, designed to tide borrowers over until their next salary instalment.
Payday loans are typically easy and quick to apply for. Lenders may be more flexible than many high street lenders about their customers’ credit history, which can make payday loans an alluring option if you have a bad credit score.
These days, the term is more loosely applied to a range of high interest, short term loans, with terms lasting from just a few weeks to 18 months. Most loans are for small amounts of money; the most common amount borrowed in the UK is £250.
Payday Loans: How Do They Work?
When you are making your application online or in person, you will specify how much you would like to borrow and when you would like to pay the money back.
With a classic payday loan, you are expected to pay back all the money plus interest before your next payday; however, many lenders now offer longer repayment options. The longer you borrow, the more you will pay overall in interest.
After you submit your application, the lender will run a ‘soft credit check’ to confirm your basic details. If you are approved, the money will be deposited to your account within a matter of hours.
The money you owe will then be automatically deducted from your account on the due date. If you are making payments over a more extended period, this will be deducted at regular intervals until you have paid back your loan in full.
Payday Loans: How Much Do They Cost?
Payday loans are some of the most expensive borrowing options available. Despite this, they remain popular due to how easy they are to access; within hours of your boiler finally packing in, you could have cash in your account.
However, this does come at a cost. Compared to credit cards and other long-term borrowing options, the relative interest you pay is much higher.
Even so, there are some protections in place. Under UK law, payday lenders cannot charge more than £24/month interest per £100 borrowed, and the total you pay back is capped at twice the amount you borrowed.
Payday Loans: Will Taking Out a Payday Loan Affect My Credit Rating?
When banks and mortgage lenders decide whether to loan you money, they will inspect your credit report. Loans from payday lenders appear in a separate category to other kinds of credit, meaning that the lender can see how often you have used payday loan companies in the past.
Even if you paid back your debt on time, some lenders could interpret frequent payday borrowing as a sign that you are struggling financially.
Payday Loans: What Happens if I Don’t Pay Back?
If there is not enough money in your account when the lender tries to deduct your payment, you won’t immediately default.
Instead, the lender can try a further two times to withdraw the money from your account at a time of their choosing. Depending on your contract, this may or may not incur penalty fees.
If you still can’t pay back the money you owe, the lender might offer you the option to ‘rollover’ your loan. This extends the deadline you have to pay back the money. It is classed as a new loan, so will include new administrative fees and your debt will continue to accrue interest in the meantime.
If you are still unable to pay back your loan, it might be a good idea to contact a debt counsellor. Debt counsellors are professional money managers who can negotiate with creditors to find an affordable repayment plan tailored to your budget.
As with all unsecured loans, failure to pay back could damage your credit score. Lenders may sell on your debts to a debt collection agency, and in extreme cases, the agency could launch legal action against you to reclaim the money.
Payday Loans: Avoiding the Debt Trap
Because of the high-interest rates and short lifetime of the loan, payday loans have the potential to land you in trouble if not properly budgeted for.
It is important that you work out your budget for repaying the debt before you take out a loan and contact your lender as soon as possible if you realize that you are not going to be able to pay it back.
Payday Loans: In Short: The Pros and Cons
|Simply, Speedy application process||You won’t have long to find the money to pay back what you owe|
|Available to people with bad credit or no other borrowing options||High interest rates make this an expensive way to borrow|
|Loan commitment is over in a few weeks if you stick to the repayment plan||Could impact negatively on future credit applications with traditional lenders|
|Easy application process and high acceptance rate can land people who can’t really afford to borrow in a difficult situation|
How Can Love Debt Free Help?
Here at Love Debt Free, we have partnered with some of the UK’s leading Debt help companies.
They have already helped thousands of people reduce and manage their debts, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these debt help companies, click on the below and answer the questions.