A leaking roof or a car that needs repairing. These are some of the 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 loans are 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? In this comprehensive, we will help you answer all the things you need to know about payday loan debt. So, let’s read on.
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What are Payday Loans?
Payday lending came into existence in the 1990s and since then its aim has been to appeal to people who have struggled to get traditional loans. They use heavy advertising and marketing techniques, to entice people who are in financial trouble to take out the 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?
Although the cost of interest has been capped by the FCA, payday loans can still charge up to 1500% APR.
A customer charter was agreed by payday lenders in 2012 to offer some protection to customers regarding fees and interest rates. However, these rules have not stopped customers from falling into uncontrollable debt. The cash injection may seem like a lifesaver but could easily become a sinking ship if the repayments are not met.
It is important to read the small print to find out exactly how much you are paying and what are the fees attached to them.
Learn about the new change to the rules in the Payday Lenders Price Cap section.
Some payday lenders offer a period of 3 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 then this could get you into serious financial difficulty.
Payday lenders won’t consider that you have priority bills to pay. They will just want you to make that repayment to them. They won’t consider 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 far more serious financial repercussions so try not to get into that position.
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 have been approved by the FCA will always ask for approval before taking any payments from your account.
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What is the Payday Lenders Price Cap?
In 2015 new rules were introduced by the FCA (Financial Conduct Authority) to tighten the rules on how much lenders could charge. This means that some payday lenders were forced to stop offering new loans:
Are there alternative solutions to getting a 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 you have been rejected by credit card or personal loans lenders to give you that much-needed cash? 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. It is 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 in which you 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, there may be some short terms strategies to assist you.
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 important to only consider this if you know you can pay it back in full next month. Remember rolling it over might offer you more time but more interest and charges will apply.
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.
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 important to know that you can break it.
There are various debt solutions 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 do need to consider that if the loan amount is over £25,000 then the company may ask you to secure it against an asset. There is the unsecured option too, which is 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 important 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 agreement 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.