Payday loans work as a short-term borrowing method to tide you over until your next pay day. There are companies who offer instalment loans over a longer period.
Who can apply for a payday loan?
Anyone can apply for a payday loan. You don’t have to be a homeowner, but you do have to have a bank account, and be over the age of 18. Some lenders allow you to take loans if you aren’t working and in receipt of benefits, but if you have a job you are more likely to be accepted for a loan.
What are the interest rates?
Interest rates on payday loans are higher than personal loans from a bank. You are paying more because you are borrowing small amounts over a short period of time and the money is in your bank very quickly. Interest rates are calculated using the Annual Percentage Rate (APR).
What exactly is APR?
The APR is used to calculate how much interest a person must pay on a loan. It was designed for borrowers with loans of more than a year because it is calculated over a 12-month period. Payday loans are paid back in under a year, so the APR calculation is very high. Companies have to tell you the APR due to the law, but this doesn’t represent payday loans because you pay them back in less than a year. What you need to look for is the amount you’ll pay back on the money you want to borrow.
How do I know how much I have to pay back?
All good companies will tell you exactly how much money you have to pay back in interest. Payday loan companies who are regulated by the Financial Conduct Authority have their interest rates capped, so although they are more expensive than other loans there are now regulations in place which means your debt won’t spiral out of control.
A typical interest fee is £25 for a loan of £100, so you would pay back a total of £125. If you don’t pay the loan back on time though, the interest fees can amount to double the loan, so a £100 loan could turn into £200. That is the most you will pay in interest, as it won’t go any higher than double the amount you borrowed.
How do lenders approve payday loans?
Most payday loan companies will do a credit check to have a look at the way you handle your finances. They do this by looking at your credit file. When you fill in an application for a loan you will be asked to tick a box giving a lender permission to obtain your credit file. They will look at the file, do their own checks and come up with your credit rating.
Every lender has a different system, but all will look to see if you have any County Court Judgements (CCJ) or unpaid debts. It doesn’t mean you won’t get approval for a loan if you have a poor credit rating, but it will depend on the lender. If you don’t have any other loans and your CCJs are paid, this will work in your favour. If you want an idea of your credit rating you can get your file and read through it. The three main credit agencies are Experian, Equifax and Callcredit. They charge £2 for a report. It is always worth checking your file in case there are any mistakes or your name has been fraudulently used to get credit.
What if I change my mind after I have applied?
There is a cooling off period of 14 days. If you decide you don’t want the money then you can use the cooling off period to cancel the loan. However, you will still have to pay back the amount you borrowed, plus any interest accrued for the amount of time you have had the loan.
For example, if you borrow £100, then change your mind two days later, you will have to pay up to £1.60 interest and there might be other fees.
How do I make the payments?
You will need a bank account. Your payday loan company will ask you to fill in a continuous payment authority, which is also known as a recurring payment. This is a contract between you and the lender. It allows the payday loan company to take the credit instalment out of your bank.
If you don’t have any money in your account the lender can try again at a later date. Direct debits are similar, but the agreement is between you and the bank. If you miss a payment they may cancel the direct debit, so if you had one for car insurance, a missed payment may mean you are uninsured to drive, with the bank asking for the whole amount to be paid in full.
What if I can’t pay?
Never miss a payment – if you know you are having difficulties, contact your payday lender immediately. It could be that you can extend your loan and reduce the monthly payments, although you will pay more interest. If you don’t say anything at all the loan company will contact you to find out why the payments have been missed. It is always better to talk to your lender, who will look again at your finances and try to come up with an appropriate solution. This is much better than ignoring correspondence and ending up with a County Court Judgement.