A loan designed to tide you over to your next payday
Payday loans are for only small amounts (e.g. £1000 maximum) for very short periods.
They are usually designed to be repaid in full by your next payday, unlike a normal loan where you can spread the cost by repaying installments over a longer period at a lower interest rate.
Payday Loan Overview
Good to Know Info
Payday loans gained a very bad reputation for turning small short-term loans into massive long-term debts, through extreme interest rates and high charges. Since the Financial Conduct Authority (FCA) tightened regulations in 2014, standards have improved, but payday loans remain a very costly form of borrowing! 🙁 😥
Interest or fees
Interest, or the fee (which is sometimes charged instead) is now capped at a daily rate of 0.8% of the amount borrowed.
So a £100 loan for 30 days would incur £24 interest; that equates to 292% APR!
However, the APR calculation shows the annual cost of a debt, and is somewhat misleading for short-term borrowing, because the cost is spread over a very short period rather than a whole year. A more meaningful measure is to compare how much interest is charged per £100 borrowed, or look at the daily rate of interest.
Penalty charges have also been capped; if a borrower fails to repay on time, their debt still builds up with charges and interest, but no borrower will ever pay back more than double their original loan.
Impact on credit rating
Payday loans can adversely affect your credit score. Lenders can tell from your credit report how often you use payday loans and will perceive you as more of a risk, even if you pay them back on time.
If you are struggling to repay on time, lenders might encourage you to rollover payments – extending the length of borrowing time and charging you further fees or interest! (Lenders are now restricted to 2 rollovers).
Repayment is often done through a Continuous Payment Authority (CPA), whereby you allow the lender to take money directly from your bank account. This can be risky e.g. if money is short and loan repayments are taken ahead of other more important bills like rent etc.
Look for cheaper options
There are many cheaper alternatives to payday loans:
- Most banks and building societies will offer FAR lower loan rates than Payday lending companies.
- A Credit Union might be a better option – they offer competitive loans for members and can sometimes assist people struggling with debt, or who are unable to borrow from other institutions.
- For short-term borrowing, an overdraft or credit card might work out cheaper than a loan.
Find out more:
Can I Find The Cash Elsewhere? Money Saving Expert
Payday Loans Facts – Money Saving Expert
Always get independent, professional advice for your particular situation.