What is a Payday Loan?
A Payday loan is a short-term loan with very high interest rates, they are offered by companies as fast-track small amount loans from £100 – £5000. Some payday loans may be for a higher amount too.
You may have heard a lot about payday loans online, on TV adverts, or mentioned in the news, but getting to grips with what they are can be a tricky business.
Is Payday Loan good?
It depends on your situation, but there’s a likelihood that a payday loan isn’t a good idea. It’s important to make sure you think things through before taking one out. You should consider:
- Why do I need a payday loan?
- Are there other sources of finance available with lower interest rates?
- Can I afford to repay the debt on time?
What is Payday Loan?
Payday loans are offered with the agreement that they will be paid back within a short period, which can range between a few days to several months. This type of loan is designed to offer instant financial relief, and the sum of money is usually paid into the borrower’s account within 24 hours of agreeing terms.
These loans are quite attractive among people who want immediate cash for car repairs, emergency home repairs, boiler repairs, emergency travel, etc.
If you take out a payday loan, you can expect to have your repayments taken from your bank account via the use of Continuous Payment Authority (CPA), the permission you give to a business to take money from your debit or credit card as and when is required.
Payday loans are usually advertised with annual percentage rates (APR) of up to 1500%, but you will never pay back more than twice the amount you initially borrowed thanks to a ruling from the Financial Conduct Authority.
Most payday loan companies are members of a trade body, and it’s worth checking to see if the one you intend to choose is. Lenders are likely to be members of one of the following bodies:
- The Finance and Leasing Association (FLA)
- Consumer Finance Association (CFA)
- Consumer Credit Trade Association (CCTA)
If the payday lender of your choice is part of a trade body, this is a sign that they are committed to learning more about their own industry and therefore more likely to offer its customers more informed and reliable information. Trade body members are more likely to stick to set laws that are for the benefit of providing better service for customers.
If you have difficulty in paying your payday loan back, it is worth knowing that payday lenders are likely to adhere to a shared customer charter which requires its members to:
- Deal sympathetically and positively
- Freeze interest and charges if:
- The customer makes repayments under an agreed/reasonable repayment plan or
- After 60 days of non-payment
If you do find yourself struggling to repay your payday loan, check with your lender and ask for advice. It’s better to tackle the problem head-on, rather than struggle in silence.
Continuous Payment Authority (CPA)
CPA is a type of recurring payment, similar to a direct debit, where you give permission for a company (such as a payday loan lender) to take money from your account on a regular basis. The CPA gives the company permission to take payments whenever they want and take payments for different amounts, without consulting you beforehand.
How does it work?
- You give your debit or credit card details to the payday lender via phone, in person, or online
- There’s unlikely to be any written record of authority being given
- The money is automatically taken and advance warning does not need to be given
Continuous Payment Authority payments are favored by many other organizations including insurance companies, gyms, and internet providers.
You can Cancel CPA if you want:
It is your right to cancel a CPA directly with your card issuer if you are struggling financially. To do so, choose one of the following options:
- Contact the company taking the payment and ask them to stop
- Contact your card issuer/bank and cancel. They must do so immediately
It’s recommended you let the creditor know that you are withdrawing your continuous payment authority but to let your bank know as a priority to stop the payments from going out. You will need to ensure that you make a payment to the payday lender, however, based on what you can afford.
You’ll need to complete an income and expenditure form and send this with a list of any other unsecured creditors you owe to, and make an offer of payment based on any leftover income you have. If your living expenses exceed your income, then a token payment is required to show a willingness to make continued payments.
Check terms and conditions / Think before applying for payday loans
Please make sure you understand that you can afford to repay the loan on payday and whether the wages you will be left with are enough to cover the essential household costs you have to pay, such as your mortgage or rent, all the utility payments, and food shopping for the week or month.