Payday loan debt is a growing financial concern affecting countless people in the UK. As the demand for quick cash rises, payday loans have gained popularity due to their accessibility and convenience. However, the high interest rates attached to these short-term loans can trap borrowers in a vicious debt spiral.
In this article, we delve into payday loans, explore the reasons people fall into unaffordable debts with payday lenders, and shed light on the available debt solutions in the UK to alleviate the burden of payday loan debt.
What is a payday loan?
Payday loans are short-term loans that are meant to be repaid by the borrower’s next payday.
They are designed to provide quick access to cash for individuals facing unexpected expenses or financial emergencies.
However, payday loans often come with high-interest rates and exceptionally high Annual Percentage Rates (APRs).
This makes them an expensive borrowing option, as the interest accumulates rapidly if the loan is not repaid promptly.
Borrowers need to be cautious as the high costs associated with payday loans can lead to a cycle of debt if not managed carefully.
How do payday loans work?
When applying for a payday loan in the UK, individuals typically complete an online application or visit a high street lender.
The payday lender assesses the borrower’s eligibility based on factors like income, credit history, and employment status.
If approved, the borrower receives the loan amount, which is usually smaller in size, often ranging from £100 to £1,000, although it can vary.
The repayment period is typically shorter for a payday loan, usually within a month or aligned with the borrower’s next payday.
However, payday loans come with high interest rates and fees, resulting in a significantly higher cost compared to traditional loans.
If the borrower is unable to repay the loan in full by the due date, they may have the option to extend or roll over the loan, but additional fees and interest charges will be applied, which can lead to a cycle of debt if left unchecked.
How much does a payday loan cost?
In the UK, the cost of payday loans is regulated by the Financial Conduct Authority (FCA) to protect consumers from excessive charges.
The FCA implemented regulations that set caps on interest rates, fees, and default charges associated with payday loans.
As of January 2015, the cost of payday loans in the UK is capped at 0.8% per day. This means that for every £100 borrowed, the maximum interest and fees that can be charged per day is £0.80.
Additionally, the total cost, including interest and fees, cannot exceed 100% of the loan amount. This helps ensure that borrowers are not subjected to exorbitant costs that could lead them to problem debt.
Why do people turn to payday lenders?
People turn to payday lenders for a variety of reasons. One common factor is the need to address financial emergencies promptly, such as unexpected expenses or bills that require immediate payment. Payday loans offer a quick source of cash during these urgent situations.
Limited access to traditional credit options is another reason. Those with poor credit history, low income, or lack of collateral may find it challenging to secure loans from banks or credit unions. Payday lenders often have more relaxed requirements, making their loans more accessible.
The speed and convenience of payday loans are appealing to many borrowers.
The application process is typically quick, and funds can be received within hours.
This makes payday loans an attractive option for those seeking immediate cash.
It’s important for individuals considering payday loans to carefully weigh the costs and implications.
While payday loans provide short-term solutions, they come with high interest rates and fees that can quickly become problematic.
What are the risks of payday loans?
There are a number of risks that it is important you be aware of before considering a payday loan.
Payday loan companies are renowned for charging as high an interest rate as they possibly can. Failure to make payments on time can also trigger additional charges and fees – making an already difficult repayment plan even harder.
Short loan repayment period
As the name suggests, you are often expected to repay your payday loan on your next payday.
It isn’t always easy to meet the deadlines set by payday loan companies and falling behind on payments can be easier than you may think.
Direct access to your bank account or Credit Union
When you apply for a payday loan you often will be asked to give the company access to your bank account for payments.
However, many people find themselves having additional funds taken from their bank account – often hidden in the small print of the loan – to cover the cost of ‘fees’.
Your bank accounts may also be shared with a number of different companies who might also attempt to take hidden fees from your account also.
How do you pay back a payday loan?
To repay a payday loan, borrowers typically have a few options:
Direct debit or standing order
The most common method is setting up a direct debit or standing order with the payday lender.
This allows the lender to automatically withdraw the loan amount, including any interest and fees, from the borrower’s bank or card issuer on the agreed-upon repayment date.
Borrowers can also choose to manually repay the loan by initiating a bank transfer or making a payment through the lender’s online portal or app.
This option requires the borrower to ensure that the full repayment amount reaches the lender by the due date.
Continuous Payment Authority (CPA)
A Continuous Payment Authority is a recurring payment arrangement that allows the lender to collect repayments directly from the borrower’s bank account.
It is essential to note that CPAs can sometimes lead to issues, as they provide lenders with ongoing access to the borrower’s account.
Many payday lenders will take the opportunity to add additional charges or make unauthorised withdrawals via a CPA.
What happens if I fall into debt with a payday lender?
If you find yourself in debt with a payday lender and are unable to make the required repayments, you leave yourself open to several potentially negative consequences.
Interest and charges owed to payday loan company
Failing to repay the loan on time may result in accumulating additional interest and charges imposed by the payday loan company.
These costs can quickly add up and increase the overall debt amount, making it more challenging to repay.
Debts passed to a debt collection agency
If you are unable to repay the payday loan, the lender may choose to pass your debt to a debt collection agency.
Debt collectors will then pursue repayment on behalf of the lender. They may contact you directly through letters, phone calls, or other means in order to seek payment.
In more severe cases of unpaid debt, the payday lender or debt collection agency may take legal action against you.
This could result in a County Court Judgment (CCJ) being issued against you.
A CCJ is a court order that states you owe a specific amount and outlines the repayment terms.
It can have significant implications for your creditworthiness and may affect your ability to obtain credit in the future.
Damage to credit file
Failure to repay a payday loan and subsequent legal actions or outstanding debts can negatively impact your credit file.
Late or missed payments, defaults, or CCJs can stay on your credit report for up to six years, making it harder to access credit or obtain favourable terms for loans, mortgages, or other financial products.
What should I do if I feel a payday lender has treated me unfairly?
If you believe a payday lender has treated you unfairly or violated their obligations, there are several resources available to help you address the situation.
Contact the lender
Start by reaching out to the payday lender directly to express your concerns and attempt to resolve the issue.
Provide specific details about the unfair treatment you experienced and explain why you believe it was unfair.
Keep a record of all communication with the lender, including dates and times of conversations or correspondence.
Financial Ombudsman Service
If you are unsatisfied with the lender’s response or they fail to address your concerns adequately, you can escalate your complaint to the Financial Ombudsman Service.
The Financial Ombudsman is an independent organiSation that helps resolve disputes between consumers and financial institutions.
They will assess your case impartially and make a decision based on their findings.
Money Helper (formerly Money Advice Service)
Seeking advice from Money Helper can also be beneficial. Money Helper provides free and impartial guidance on managing money, including dealing with payday lenders.
They can offer support, advice, and information on your rights and options in situations where you believe you have been treated unfairly.
Where can I get debt advice and support with payday loan debt?
While using a payday lender may seem like the best option at the time, short-term loans can cause long-term financial problems.
If you find yourself unable to afford mounting payday loan debts, don’t hide your head in the sand. Reach out to Talk About Debt.
We’re a debt management company that helps thousands of people deal with payday lenders every year.
For free debt advice and solutions that can help you get on top of your payday loan debt, get in touch with one of our advisors today.