Payday loans are an expensive way to borrow. Never take out a payday loan unless you’re 100% certain you can repay it on time and in full – otherwise the costs can soon spiral out of control.
If you’re thinking of getting one, here’s what you need to know: https://www.moneyadviceservice.org.uk/en/articles/payday-loans-what-you-need-to-know
How payday loans work
Payday loans are short-term loans designed to tide people over until payday. The money is paid directly into your bank account.
Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period.
On the repayment date, the lender takes the full amount you owe plus interest directly from your bank account. This happens even if you need the money to pay essential bills like mortgage or rent, heating and food.
A payday loan will just make your situation worse if you can’t afford to pay it back on time. It may also affect your ability to get credit in the future.
What payday loans cost you
Did you know?
Over a year, the average annual percentage interest rate (APR) could be up to 1,500% compared to 18% for a typical credit card.
Payday lenders cannot charge more than 0.8% interest a day or a maximum of £24 if you borrow £100 over 30 days. If you repay your payday loan late, you’ll usually also be charged a default fee and daily interest on top. Under rules introduced by the Financial Conduct Authority (FCA) in January 2015, if late payment or default fees are applied, these must not be more than £15. And there are limits on how much these extra fees and interest charges can add up to. Overall, you will never be asked to pay back more than twice the amount you borrowed.
There are better safeguards for consumers now than there were a few years ago, but even so a payday loan is only manageable if you pay it back on time and don’t roll it over (effectively extend your loan for another month). Otherwise, you could end up paying a lot in interest and charges.
If you cannot repay your payday loan and decide to roll it over, a payday lender can only let you roll over your loan twice. And the lender must give you an information sheet with details about free to use debt advice services, before rolling over your loan.