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A leaking roof or a car that needs repair are some emergencies that don’t often get calculated into your monthly expenditure. Having a rainy-day fund helps, but what happens if you don’t have that contingency and need financial help quickly? Payday loan debt is often the answer to those problems.

Payday loans offer a fast cash solution to help you get out of those financial troubles in the short term. However, in the longer term, they might not be as forgiving.

What are payday loans? What are the problems with being too dependent on a payday lender? What help can you get when you have a payday loan debt? This comprehensive will help you answer all the things you need to know about payday loan debt.

What are Payday Loans?

Payday lending came into existence in the 1990s, and since then, it has aimed to appeal to people who have struggled to get traditional loans. They use heavy advertising and marketing techniques to entice people in financial trouble to take out loans.

Getting the loan is the easy part, as the money is sent quickly to your bank account through a direct money transfer; however, paying it off is when things start to get tricky.

Payday loans receive a lot of bad press as the loans come with high-interest rates and charges. For example, the annual percentage rate (APR) of a payday loan could be up to 1500% compared to a credit card which is 22.8%.

Are Payday Loans a bad idea?

  • Payday loans charge high-interest rates and late fees

Although the FCA has capped the interest cost, payday loans can still charge up to 1500% APR.

The cash injection may seem like a lifesaver but could easily become a sinking ship if the repayments are not met. Payday lenders agreed on a customer charter in 2012 to protect customers regarding fees and interest rates. However, these rules have not stopped customers from falling into uncontrollable debt.

It is essential to read the small print to find out exactly how much you are paying and the fees attached to them.

Learn about the new change to the Payday Lenders Price Cap section rules.

  • Payday lenders may ask for full payment

Some payday lenders offer three months repayments; however, others require repayments in full the next time you receive your wages. However, if you have not calculated the payment into your monthly budget, this could get you into severe financial difficulty.

Payday lenders won’t consider that you have priority bills to pay. They will want you to make that repayment to them. They won’t believe that you have utility bills to pay or a family to feed. This is when people get into further financial difficulty as it has a knock-on effect on your other bills

For example, council tax debt or income tax debt has much more severe financial repercussions, so try not to get into that position.

  • Payday lenders may have CPA (Continuous Payment Authority)

As security for taking out the loan, some lenders may ask customers for CPA before approving the loan. This means that your lender will have access to take payments directly from your bank account up to the amount it chooses.

However, there must be sufficient funds in the account and lenders who the FCA has approved will always ask for approval before taking any payments from your account.

What is the Payday Lenders Price Cap?

In 2015, the FCA (Financial Conduct Authority) introduced new rules to tighten the rules on how much lenders could charge. This means that some payday lenders were forced to stop offering new loans:

  1. Interest fees must not be higher than 0.8% per day of the amount borrowed, even when rolled over
  2. Default charges must not exceed £15. Interest rates on unpaid balances must not go over the initial amount borrowed interest rates.
  3. Borrowers should never have to pay back more fees and interest than the original amount borrowed.

Are there alternative solutions to getting Payday Loans?

A lot of debt advisors advise against taking out a payday loan. Sometimes the risks outweigh the benefits as the high interests rates and the late payments charges certainly don’t appeal to most of us.

However, what do you do if you have bad credit and have been rejected by credit card or personal loans lenders to give you that much-needed cash? Please take a look at some of our alternatives below.

  • Local credit unions – Contact your local credit union, and they will provide you with straightforward and affordable advice on financial help, which is far cheaper than payday loans.
  • Look at your budget – It might seem like the obvious thing, but if you already haven’t made a budget of your income and expenditure and see where you can reduce costs, then try and do this. Download our budget planner to help you.

An extra £100 saving on your monthly food budget could help contribute to the surplus cash you desperately need. It could also mean that you would not need to borrow as much as you already have that cash available.

Find out more about how you can cut costs on your monthly food budget.

  • Ask for help from family and friends – It would be much better to ask a family or friend to loan you the money rather than a payday lender. Likely, they won’t charge you as much interest, so take the help if it is there.
  • Sell unwanted items – Remember, one person’s junk may be someone else’s treasure. There are plenty of places that offer you ways to sell your unwanted items. Have a clear out of the loft or garage and sell items that you could get for the cash.

Find out more tips on how to stop getting into debt.

I can’t pay my Payday Loan. What should I do?

Before looking at debt solutions to help you with your payday loans, some short-term strategies may assist you.

  1. Ask for a loan rollover

Some payday loan companies offer you a loan ‘rollover’, which means that your loan is rolled over to next month, giving you extra time to pay.

However, it is essential to consider this if you know you can pay it back in the entire next month. Remember rolling it over might offer you more time, but more interest and charges will apply.

  1. Stop your payments

If you know you can’t make your loan repayment this month, then you could take action by stopping the payments.

A direct debit, standing order and a cheque can all be cancelled by contacting your bank; however, it would also be a good idea that you inform your payday lender that you are doing this.

  1. Stopping a CPA

The FCA has stated that you have the right to cancel a CPA. There are more details on the Financial Conduct Authority’s website with their section relating to Know Your Rights: banking.

Can I get debt help with my Payday Loan debt?

If you have already taken out a payday loan and are now in a situation whereby you are struggling to pay it off, then it is time to ask for help.

Payday loans target people with existing financial problems who have a bad credit rating. However, payday loans come with extremely high-interest rates, and the late payment charges keep adding up. This becomes a vicious cycle, but it is essential to know that you can break it.

Subject to the eliVarious debt solutions are available to help you consolidate your payday loan debt.

  • Debt Consolidation – This is when you take out one debt consolidating loan to pay off various others. Offering you a more affordable monthly payment, you need to consider that if the loan amount is over £25,000, the company may ask you to secure it against an asset. The unsecured option is also riskier for the lender, so they are likely to look at credit score and financial health in much more detail before they offer you this option.

Find out more about the benefits and risks of debt consolidation.

  • Individual Voluntary Agreement (IVA) – A IVA is a formal and legally binding agreement between your creditors to pay off your loans. As it is legal, it needs to be set up by an Insolvency Practitioner. That person will charge you a fee to act on your behalf.

IVAs come with a whole host of questions, and it is essential to understand the details of IVAs before you consider them as a debt solution.

  • Debt Management Plan (DMP) – A debt management plan is an agreement you have made with your creditors to get you out of debt and try and pay them. The deal is informal, and it is usually negotiated by a third party to lower your monthly payments paid to your creditors.

Find out more information on how a debt management plan could help you.

There are other debts solutions to help you get out of debt. To understand which one is right for you, check out our debt plans.

If you have debts of over £5,000, and you're struggling to repay them, get in touch today!

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