By Martin Updated August 2015
Need some quick and easy cash? A payday loan feels easy, but even now the amount of interest you pay has been capped, these loans are an still an expensive nightmare. Take one out and you risk scarring your finances, and the possibility of paying back double what you borrowed.
10 payday loans need-to-knows
They're high cost, short term loans with more tricks than Paul Daniels
Payday loans are short-term lending often used by people to tide them over until payday. They're often very easy to get – some even do it on mobiles while drunk, which makes them feel convenient. But it's that very ease which is the danger. If you don't think about what you're doing, it can be a nightmare.
What do I need to watch out for with payday loans?
The loans are typically only supposed to last for days, or maximum of a month, for amounts of up to Ј1,000 or so. The stated cost can be fairly low, especially when compared to unauthorised overdraft charges. But many borrowers get stung by tricks used by payday loan firms, as well as their lending decisions.
While we don't like these loans, for a small sliver of the population (not the millions who get them), they are lending of last resort which, used right, can solve a one-off hole in people's finances.
But please read each and every warning in here, explore every alternative, and consider your options very carefully before deciding a payday loan is for you.
Payday loans charge more for a month than credit cards do for a year
Payday lenders usually charge a fee instead of an interest rate. Typically, a Ј100 loan for a month has a fee of around Ј25, so you need to repay Ј125. To put that in context, if you borrowed the same amount on a bog-standard credit card at 20% APR, then provided you didn't miss any repayments, it would cost Ј20 to borrow Ј100 for a YEAR - Ј5 LESS than payday lenders charge for just one month.
1,000%+ APRs are mostly meaningless apart from as a welcome scare
If you express the typical charges payday lenders make as APRs most work out as over 1,000%. This is a useful warning against what can be dangerous products, but these APRs are mostly meaningless. That's because if you borrow over a very short term, even a small fee can become an astronomical APR.
Why do they have to put these APRs if they're meaningless?
Well, it's a legal requirement that if you're offering loans to people, then you have to have your APR marked in large letters on all adverts, and on your website.
But, many have pointed out the pointlessness of this with a payday loan. APR stands for 'annual percentage rate'. Put simply, it's the rate you pay on what you've borrowed over a year, including all interest and charges.
But, here's where it falls down. Payday loans are usually taken out for a matter of weeks, rather than for years. So, the amount you will have to pay back is really more relevant than the APR for these loans. See Martin's blog on the APR of repaying the price of a pint on Ј20 over a year.
But, if you're thinking of getting a payday loan, the most important thing is.
The real danger comes if you can't pay back in time – then these horrific APRs start to become close to reality as charges and fees add up.
If you're regularly getting payday loans, there's a problem
Payday loans should never be used as a way to fill the gap between your incomings and outgoings in a month. If that's happening to you, there's a fundamental problem that a payday loan will only make worse not better. The most important thing to do is to sort out a budget. to try to balance your costs and income.
It's very easy to get one payday loan for a small amount, then another the next month, and before you know it, you're in a debt spiral, as happened to forumite leopardxgirl :
About 8 months ago I borrowed around Ј90 to pay for a train ticket to see my now ex-boyfriend. What a slippery slope that was. I'm now approx Ј3,500 into payday loans across four payday lenders. I seem to have got myself into a horrible situation where I can only barely afford the interest repayments on these darn things every month.
If you can't repay it on time, you can't afford to get one
If you do go for a payday loan, the crucial point is that you know how you are going to pay it back. If not, then you can't afford the loan. No matter how desperate you are, the end result will leave you much worse off (see payday loan alternatives ).
If you feel desperate and that it's your only option, even though you aren't sure you'll repay it, you'd be far better getting one-on-one debt counselling help from a non-profit debt counselling agency.
Beware the rollover – it's only a lottery win for lenders
Some payday loan companies actively encourage you to roll over your payments - where they extend the time over which you are borrowing the money, and hit you with more interest for the privilege. Beware any lender who encourages you to roll over your loan for another month.
What happens if I roll over my loan?
Many lenders allow you to 're-borrow' if you can't pay them back within the time you said you would. Watch for:
Don't worry, if you can't afford to pay it back this month, just pay the first month's Ј25 fee and then repay Ј125 next month
This means you've still only borrowed Ј100, but are paying a big Ј50 in interest instead of the original Ј25. If you can't repay next month, the same thing will happen. This is where it can get dangerous and incredibly expensive, leaving you repaying many times more than you need to, as happened to forumite Super Daz.
I have several payday loans which I am struggling to clear. Some loans I've been rolling over for some time. For example, on one I've paid Ј750 in rollover charges on a Ј300 loan, and there's still Ј300 (and Ј75 interest) outstanding.
However, the new price cap will mean that if you take a loan, you won't ever pay back more than double the amount you borrowed. So, it's likely that to fit in with this cap, lenders won't allow you to roll your loan over more than one or two times anyway.
But, don't just rely on this cap. If you're in a situation where you need a payday loan, always, always have a plan for how you'll pay back the money next month so the costs don't spiral out of control. See How to Budget .
Borrowed once? They'll try to seduce you again
If you do repay on time, there's still a big danger lurking. The payday loan company knows you're a 'good' customer - it's successfully made money from you. So it knows if it lends you more money you're likely to be able to repay, making it even more money.
This is a major concern. You may have only taken a Ј100 loan to pay a few bills until your next payday. Then after repaying, the lender tries to tempt you by offering a larger amount with even bigger charges. Always resist this, even if you're offered a 'discounted fee'! It's often just a ploy to get you to borrow more.
Payday loans can hit your ability to get a mortgage - even if paid on time
Apply for any credit, and lenders 'score' you to predict your likely behaviour. They use data from credit reference agencies as part of
this (see the Credit Scores guide). But a payday loan on your credit report can have a striking effect. All credit reference agencies differentiate payday loans on your credit report. They’re in a different section, so underwriters (who make lending decisions) can tell how much and how often you've used payday loans.
Can payday loans stop me getting a mortgage?
A few mortgage lenders, including GE Home Lending and Kensington Mortgages, have publicly said applicants who have used payday loans won't be accepted for a mortgage with them - even if they were fully repaid on time.
Yet even those who haven’t spoken up are likely to behave in a similar way. One of the UK’s top technical experts on mortgages, Ray Boulger from broker John Charcol, says:
This is because the presence of a payday loan on the credit record of a mortgage applicant implies there's some underlying problem with their budgeting and money management. That throws serious doubt on their ability to consistently meet a monthly mortgage payment.
My lender says getting a payday loan will improve my credit rating. Is that true?
Some payday loan firms claim getting it has a positive effect.
Of course, if you get a payday loan, paying it in full and on time is important. It'll certainly give you a relatively better score than not doing so. Similarly, missing a payment or late payments will harm your credit score.
Yet payday lenders' claims that getting one will help your credit score are likely to be overblown. It can boost indicative scores from the credit rating agencies – but this isn't the same as making lenders more likely to give you conventional credit cards or loans.
Each lender scores you differently, based on its own wishlist of what makes a profitable customer. Some will see a marginal improvement from payday loans – but equally, others may follow the path of mortgage lenders and see it as a big no-no.
If you need to rebuild a bad credit history there are other, better ways to do that, with specific Credit Cards for Bad Credit.
My payday lender advertises 'no credit checks'. Isn't that a good thing?
Some, especially smaller, payday lenders don't share your payment data with credit reference agencies. These are generally the ones that advertise "payday loans with no credit checks".
This can seem like a good thing, as it won't "ruin" your credit rating by putting the payday loan on your file (though a future lender could ask you).
But it also means the payday lender's not lending responsibly as it's not checking you can afford to repay. It also means other lenders won't be able to see the loan, so as a consequence, their lending may not be responsible either.
The 'responsible' payday lenders - the ones which credit check each applicant – say they turn down between 60% and 90% of first-time applicants because their credit records show they're already too indebted to have a good chance of paying their loans back.
Think carefully if you're going to a payday lender because it advertises 'no credit checks'. Can you really afford to repay it?
They'll take your (or parents'/friends') money whenever they want
A common tactic of payday lenders is to ask you to pay using something called a continuous payment authority (CPA, also known as a recurring payment). This is where you tell it the 16-digit number on the front of the card. This gives the lender the right to take a payment whenever it wishes. For those on the brink of being able to pay their bills each month, this can be perilous. A commercial lender swooping in and diminishing your bank balance may mean you are unable to pay something else, possibly a priority debt like council tax.
How can I cancel a Continuous Payment Authority?
You have a right to cancel CPAs, simply by asking the bank which runs your account (read the full Recurring Payments guide). We're not advocating reneging on your payday debts, but the lack of control these types of payments give you is scary - it's far better to call them and pay up as and when you owe the money.
This also affects parents or friends who may make a payment for you
The fact continuous payment authorities are used isn't just a problem for the borrower themselves. Often parents or friends agree to pay back the loan (or just one repayment) on the borrower's behalf. We've had reports of payday lenders keeping details of these, and then using them both for that loan and any future loans - even without an agreement - and taking from the other account.
Payday lenders can be bad – loan sharks are 1,000x worse!
Payday loan companies, though they may lay traps for you, have a credit licence (check at the FCA Consumer Credit Register ). So if things go wrong, you have some limited room for recourse. But loan sharks are a completely different beast. They're unlicensed, they break the law, often go knocking door-to-door and at worst use they horrific methods - including violence and threats of violence against the borrower or their family or children - to get their money repaid.
How do I report an illegal loan shark?
If you know of loan sharks near you, report them on 0300 555 2222 (you can also text LOAN SHARK and lender's details to 60003, or visit the Government's Report a Loan Shark page).
When borrowing, always check whether the lender has a credit licence. But don't rely on that alone. Most consumer credit licences only cost Ј1,000 to get, so they don't necessarily guarantee a legitimate business with wholesome practices. Google the company as well, and do whatever else it takes to find everything you can about it.
Real life payday loan experiences it could happen to you.
'Ј1,000 loan cost me Ј4,000'
My payday loan spiral started in 2010/11. It started with one payday loan, which I failed to repay on the repayment date due to an unexpected bill.
I then thought stupidly to borrow from another lender and again, couldn't afford to repay. I borrowed Ј1,000 from different lenders, but in the end it cost me over Ј4,000.
You may think I'm stupid, but it happens and you can't control it; it makes you feel helpless and depressed.
Happily my family could afford to pay my debts for me (which I am paying back now). Some people aren't as lucky and can't get that help, so before you take out one of these ludicrous loans that could possibly destroy your finances, stop and think. 'Do I really need that money?
'Smallloanturnsbigdebt' 'I have to keep taking it out each month'
I originally got a payday loan because my son was in hospital and it costs me about Ј30 a day in parking, petrol and food when he is in there!
I started off borrowing Ј120 and have to keep taking it out each month. But with interest it's Ј175, so I took that out then next month Ј220 and I am up to Ј388 because I can't manage without that money each month!
Not everyone gets into difficulty with payday loans. Some people use them, pay them back on time, and don't take another out.
'Would use it again'
Needed to pay a bill before payday was due, found it fast and friendly, but you HAVE to pay it back when you say. If you can't, tell them and get an extension, would use again.
Have you had a payday loan experience you'd like to share?
The 'can I find the cash elsewhere?' checklist
If you're struggling for extra cash, there's a heap of options to try before plumping for a payday loan. In fact, you may not need to borrow at all.
Category: Payday loans