Payday loans have featured heavily in the media recently amid criticisms from the government and media, about the irresponsibly high interest rates they set on repayments. Payday loan providers have a reputation for targeting the most vulnerable and also come under criticism for rolling over loans to loans customers several times, effectively trapping them with severe financial problems.
If you're looking to take out a payday loan, it's likely that more conventional forms of borrowing, such as personal loans and credit cards, are unavailable to you. However, there are a few other sources of financial aid you can turn to. Please refer to our guide on 'Alternatives to Payday Loans' for more info.
Still convinced you need a payday loan? Our guide should at least inform your of the dangers and pitfalls.
How do they work?
As the name suggests, payday loans are intended to be a temporary loan which merely tides you over until your next wage slip comes through. Some providers allow you to choose the repayment date, which can be dangerous as it allows the temptation to let the debt run for longer than you originally intended – and at extortionate interest rates.
Interest rates are normally advertised at being between 700% - 1,500% APR. The amount you can borrow is also dependent on provider, with some lending as much as £3000. The length of the available will depend on the lender; some offer only 30 day loans, whilst others let you borrow the cash for a full twelve months. To give you an idea of the cost of borrowing; if you were to take out a loan for £100 for a month, the total amount you can expect to payback will be around £125.
Once a loan has been approved it should be credited to your account within 24 hours. The repayments are then deducted directly from your bank account on the agreed date; whether that be on your next payday, or alternative date which you agreed during the application process.
Getting help with existing payday loans
If you've already borrowed money and are struggling to get back in the black, there are a few things you can do. OFT guidelines stipulate that the payday lenders must work with customers fairly to agree a reasonable payment plan for settlement of the debt.
The main payday lenders are all signed up to a charter which requires members to be transparent about costs and charges during the application, as well as being sympathetic and reasonable with customers experiencing difficulty. As a result of this charter, you should expect interest and charges to be frozen once you've agreed to a repayment plan with the provider.
If you encounter any difficulty with the provider, you should consult a free debt advice service such as 'Stepchange' or 'National Debtline'. These services will advise as to what is deemed as reasonable repayment scheme based on your personal circumstances, and will even act as an intermediary to help you to negotiate terms with the loan provider.
Alternatives to Payday Loans
As mentioned previously there are several alternatives to payday loans. These are all targeted towards those with difficulty obtaining credit from mainstream sources and include employer advances, credit unions and social fund loans. You'll find more information on this in our 'alternatives to payday loans' article.Image: © Shaunwilkinson | Dreamstime.com