Many of us will experience financial difficulties at some point in our lives. Whether it’s trying to save up for a deposit on a house, clearing student debts, saving up to afford Christmas presents for our children or even being able to afford the rent each month, money concerns are one of the main causes of stress and anxiety in modern society.
Money lenders quickly recognised a gap in the market for readily accessible money for consumers who were desperate for money yet may not have met the credit requirements from other lending sources and henceforth the payday loan was born.
What are Payday Loans?
The clue is in the name; payday loans are designed to tide you over until payday, by which time you should be able to afford to pay the loan back. This sounds all well and good in principle as long as you play by the rules! A payday loan should never be treated as a long term solution to financial problems. If you do decide to take out a payday loan it should be for a short period of time only; most are typically taken out over a month i.e. the time before your next payday. In an ideal world you would be living within your financial means, but if something does crop up before you have been paid and you find yourself in a situation where you need money urgently then a payday loan could potentially be the answer.
How do they work?
Before you even consider taking out a payday loan you should know exactly how they work and the general terms that most lenders will expect you to adhere to. Unlike conventional loans, payday loans are incredibly easy to apply for and most are typically approved within hours of your application; in fact rather alarmingly some have even been know to be approved within minutes.
When your application has been approved (we say ‘when’ rather than ‘if’ as there aren’t many that don’t get approved) the loan amount will be paid directly into your bank account giving you immediate access to the money. The majority of lenders stipulate that the money, plus interest, should be paid back after a month, although there are some who allow you to choose the repayment period, such as Wonga. One thing most lenders will insist upon is that you set up a recurring payment or a continuous payment authority, which authorises them to automatically take the loan amount and interest from your bank account on the morning of the repayment date, regardless of whether there is enough money in your account or not.
How much can I borrow?
Because payday loans are looked upon as short term solutions, the amount you can borrow is low. The disadvantage of this is that you may need more money than this type of loan can provide you with, but more importantly, the advantage is that you are more likely to be able to afford the repayment at the end of the month and the interest, although high, will hopefully be at a more affordable repayment rate. Payday loans typically start as low as £50 and can go up to a maximum of £1,000, but you will need a much better credit score if you want to take out a larger amount. Some lenders will also restrict the amount they lend if it is the first time you have borrowed from them.
How much interest will I be charged?
Each and every loan will have it’s own APR, but expect it to be high and expect to pay up to a third on tip of the amount you originally borrowed. For example, if you take out a £100 loan, at the end of the month this will have risen to £130 and if the money is not available in your account you may also be stung with a late payment penalty, which could add on another £20. You may also be given the option to rollover into the next month, but again another £30 will be added so you are then up to £180 on a loan that originally cost you £100, can you see how this could quite easily spiral out of control? Interest is calculated on a daily basis and there are also usually charges associated with initially setting up the loan. Make sure you read through all the terms and conditions to ensure there are no hidden penalties, such as early repayment charges.
OK so reading through this it kind of seems that as long as you play the game right, stick to all the right terms and pay the loan amount back on time that actually payday loans aren’t all that bad, so why the bad press?
What’s so bad about Payday Loans?
Unfortunately, most payday lenders are out to make a quick buck, which means they really couldn’t care less about helping you sort out your financial mess and clearing any debt you have. In fact, we would go so far as to say that ultimately they would prefer it if you got yourself in even bigger debt, as that means more money for them. Let us explain with our list of reasons why payday loans are not such a good idea:
- Lenders don’t care about the consumer – The Citizens Advice Bureau conducted a survey of 2,000 loans taken out from 113 lenders and rather alarmingly in 9 out of 10 instances the borrower wasn’t even asked to show documents as evidence they could afford to repay the loan It doesn’t exactly take a rocket scientist to work out that if you can’t afford to pay back a loan you are headed for even more trouble.
- It will affect your future credit – Every time you apply for a loan, a credit card, a mortgage or in fact any type of credit it gets logged on your credit file. This credit history is then referred to by other lenders when you want to take out another credit product. Most reputable banks and financial institutions frown upon payday lenders and if your credit history flags up a payday loan, regardless of whether you had difficulties paying it off or not, they may well turn your application down.
- Other accounts may be at risk – If you don’t have the available funds in your bank account to pay off the loan plus interest at the end of the loan period you are putting other bank accounts in jeopardy. Some lenders will do whatever they can to get their money and that may mean taking it from other accounts that you have used in the past to make payments from. The account doesn’t even need to be in your name; it could be a friend or family member’s account that was used to help you with a past repayment, so beware.
- The APR is HUGE – High annual percentage rates are how these companies stay in business and make their money. Here are a couple of examples: Wonga has an APR of 5,853% and The Money Shop sets theirs at 2,400.8%.
- They prey on the vulnerable – If you’re someone who struggles to keep on top of your finances and has a history of late payments or loan deferrals then watch out because you are a payday lenders prime customer. They know you are someone who will probably make them a lot of money in the long term and will be keen to offer you, what may seem like, extended offers and later repayment dates, but watch out because you don’t get anything for free with a payday loan!
- Lenders always want more – You can’t win; if you’re someone who always make repayments on time the lender will repeatedly offer you more and more in future, but if you’re someone who struggles to make repayments in time you will be offered more time, at your cost of course, a higher borrowing amount and in some rare cases you may even be offered a new loan to pay off an existing loan. Don’t fall for it!
What happens if I don’t have the money in my account?
So, you’ve taken out a payday loan and the repayment date is fast approaching, but something’s happened to the payroll system at work and you’ve been told you’ll be getting paid a couple of days late. There’s no way you’re going to have enough money in your bank account to make the repayment so what’s going to happen?
Well, firstly, the lender will attempt to take the money from your account regardless and when your bank declines this transaction through lack of funds, the lender will continue to ask the bank for all or part of the money. If you have an overdraft this may well cover it, but not all overdrafts are free and you may incur charges from your bank for going over a certain amount. In the longer term, however, overdraft fees will be a lot cheaper than late payments charges on a payday loan.
If the lender really isn’t having any luck getting any money from your bank they will charge you with a late payment fee and then offer you the opportunity to rollover the loan. Although you will have longer to pay off the loan, there will naturally be even more interest added onto it, along with the late penalty charge and any other administration fees the lender may hit you with. Suddenly that £80 loan you started out with isn’t looking like such a good idea! It is now a legal requirement for all payday lenders to provide their customers with an information sheet that lists details of free debt advice, before they allow you to rollover a loan. Finally, no lender should allow you to rollover a loan more than twice and if you are offered it for a third time you should report them to the Financial Ombudsman Service (FOS).
What can I do if I find myself in financial difficulty?
If you’ve taken out a payday loan with the belief that it would be the answer to all your money worries but the reality is that things have worsened and you now feel as though your drowning in a sea of debt more than ever, don’t worry because there is help available and you can get through this. There are a few different options available to you:
- Get in contact with a debt advice service who will be able to offer you free, confidential advice about how to sort out your finances and come up with a plan to help clear your debts.
- Check if there is a Credit Union in your area and if there is find out whether you would be eligible for a credit union loan. Yes, it’s another loan when you really could do without borrowing even more money, but they are limited by law to offer an APR of just 26.8% and taking out this type of loan to pay off other, more expensive loans is a much more beneficial solution.
- If you are really struggling and have reached a point where you can’t even find enough funds to support day-to-day living you may be able to get help from the Social Fund. The Social Fund is a Government run scheme that provides emergency budgeting loans for those most in need. Contact Jobcentre Plus for more details and to find out if you qualify for this type of funding.