What-Is-A-Payday-Loan-Consumer-Debt-Help

What Is A Payday Loan

If you are in debt, you may be considering a payday loan to clear it. Payday loans are very easy to get, but the interest rates can be very high. That’s why you should do some research on it and look at other alternatives before using this option. But what is a payday loan exactly and where can you get one from?

Table of contents:

    Definition Of A Payday Loan

    A payday loan is a short term unsecured loan for small amounts of money. Generally speaking, people borrow between £50 and £1000. An unsecured loan is a loan that doesn’t require any type of collateral, so your assets are not at risk. However, interest rates are higher exactly because there is no collateral, so it’s a higher risk for the lender.

    The term ‘payday’ means that the borrower must repay the money, plus interest, on or shortly after their next payday.

    Benefits Of A Payday Loan

    Depending on your financial situation, including your credit history, you may be finding it difficult to get a loan. Perhaps you need some money to clear your debts or reduce them as soon as possible.

    One of the benefits of a payday loan is that you can get the money straight away without having to wait for months or until your next salary payment. So the money could even arrive in your bank account on the same or next day that you apply for the loan.

    Another benefit is that the loan is easy to access. Once it goes through, you can get the money from your bank and use it straight away. You don’t need to wait to see someone.

    Also, if you have bad credit history, this may be one of the only options available to you. A payday lender doesn’t worry about your past, they only want to know if you can afford the loan now.

    Negatives Of A Payday Loan

    However, getting a payday loan may seem easy and quick, but it’s not always the best option.

    Firstly, payday loans are available from many different people and organisations, but not all lenders are reliable. Some lenders may target you particularly because you have a low income and bad credit, therefore you may think this is the only option to you.

    Secondly, payday loans can be incredibly expensive. For example, some lenders may apply interest rates of up to 1,500% APR. This can catch out some people and it’s very easy to see how it leads to further debt. As a borrower, you are at a greater risk of falling into a spiral of debt.

    Furthermore, payday lenders can request to take recurring payments directly from your bank account through a Continuing Payment Authority (CPA) application. You can cancel their authority to do this, but some borrowers are not fully aware of the options.

    Before You Take Out A Payday Loan

    Before you consider taking out a payday loan, there are a few steps to take first.

    Step 1: Talk to a professional debt adviser, you can get free advice from a number of charities specifically set up to help you. This will give you the chance to find out about other options to clear your debt first.

    Step 2: If you still think a payday loan is your best choice right now, then shop around. There are many lenders on the market. A responsible lender should always check with you that have enough money coming in to your account to pay the loan back. They should also talk you through the finer details of the loan and what will happen if you can’t pay it back.

    Step 3: Remember to check the APR rate of the loan. Compare with other lenders and make sure you are absolutely clear what to expect for the duration of the loan.

    Who Regulates Payday Loans

    Online payday lenders must legally publish their deals on at least 1 price comparison website, so you can compare them. The Financial Conduct Authority regulates the website.

    Payday loans come with a 14 day cooling period. This means that you can cancel the arrangement within 14 days if you change your mind.

    Furthermore, there is an interest cap on payday loans of 0.8% per day. You shouldn’t have to pay back more than twice the amount you borrow.

    When Do You Pay The Loan Back

    Typically with a payday loan, you have a month to pay it back, plus interest. Usually, a borrower gives the lender permission to take the money from their bank account. This is called a CPA or ‘Continuous Payment Authority’.

    Payday Loan Examples

    To help you visualise how much you may end up paying in total, here are a few examples.

    Example 1: You need to borrow £400 to pay off an emergency repair bill and need the money now. A lender offers the loan with a representative APR of 939.5% and an interest rate of 255.5%. You agree to pay it in 4 monthly instalments.

    Your total repayment is now £597.48, so you’ll pay 4 monthly instalments of £149.37. That’s £49.37 interest each month.

    Example 2: You need to borrow £400 again, but the APR is now 1,506% and interest rate is 439%

    Your total repayment for this loan would be £630.85 so you’ll pay 4 monthly instalments of £157.25. That’s £53.25 interest each month.

    What If You Can’t Afford The Repayments

    If you find yourself in a situation where you can’t pay it all back on the agreed date, the lender can add more charges for late payment. Also, they can use CPA twice to try to get the money back directly from your account. However, they cannot use CPA more than twice.

    Maybe you know you can’t afford to repay the loan. In which case, you can contact your bank to stop payment being taken. You must do this at least one day before the payment is due.

    Finally, your lender may offer a loan deferral or extension if you can’t pay. Be wary of these offers as it’s tempting to borrow more money to pay off the first loan which can lead to a difficult spiral of more debt. If you are struggling to pay back what you owe, seek free debt advice as soon as you can.

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