Payday loans

Many people search for financing options when they are running short of cash to see them through to their next pay date. Whether it is a broken car that is needed for work or a faulty appliance, we all have our own small cash emergency that catch us unprepared. Payday loans are designed to plug these short term financial holes in people's budgets and see them through to their next pay day.

What Is a Payday Loan?

A payday loan is a form of short-term finance which is usually paid back on your next payday in full. They can be accessed via a direct lender or a payday loan broker. They usually tend to be for smaller amounts compared to more traditional ways of borrowing and are designed to cover financial emergencies quickly and repaid in full on the day the borrower gets paid.

What's the difference between payday and short term loans?

There isn't a huge difference between payday loans and short term loans. They are very similar financial products designed to plug unexpected financial emergencies. The main difference is that usually payday loans are let for a shorter amount of time compared to short term loans. It's rare to see a payday loan for more than a month or two, but there are often short term solutions with repayment terms for a year or two.

What is the interest rate of a payday loan?

While the annual percentage rates on payday loans might seem exorbitantly high at first glance, you need to remember that they are not a product meant to be borrowed over a long time. The widely used APR doesn't really apply here as these types of products are usually repaid over a month or two so there isn't an accurate way to calculate the annual percentage rate.

You can see the costs and the fees involved below:

What are the costs and fees?

In the UK, there is a cap on payday loans interest rates and fees. This means that you will never pay more charges or fees than £24 on every £100 borrowed. On top of that, there is a £15 plus interest limit on fees in case you miss your payments or default on the agreement.

The overall cap on fees and costs mean that you will never have to pay back more than twice the amount you initially borrowed.

How long do I have to pay it back?

Your repayment schedule will vary depending on the lender you choose, but you usually have to repay within a month. There are different products with different repayment schedules, but the general consensus is that payday loans usually have a short repayment period and are repaid in full the next time the borrower is getting paid.

How do I pay it back?

Most payday lenders require you to sign up to a Continuous Payment Authority so they can collect the payment automatically from your debit card. You will have the schedule of the repayments and the exact dates in your loan agreement.

Best uses of a payday loan

While there is a lot of negativity in the press, there are some very legitimate uses for them. For example, if someone needs quick access to cash to plug an unexpected hole in the month's budget, a payday loan could be the difference between having heating or not in the middle of the winter if your boiler decides to break down.

You need to remember, however, that these products are not a long term solution to a financial problem. They shouldn't be used regularly and they always have to be paid back in full and on time. Misusing them can lead to long term financial issues and it can impact one's ability to access credit in the future.

Can you get a payday loan with bad credit?

In general, there are payday loans available even to people with bad credit. There are plenty of payday lenders in the UK who specialise in lending to people with less than perfect credit history.

Do I need a guarantor?

In most cases, you won't need a guarantor to get a payday loan. As we mentioned above there are plenty of UK direct lenders willing to consider applicants with poor credit history without the need for a guarantor to co-sign the agreement.

Does anyone offer guaranteed payday loans?

There is no such thing as guaranteed payday loans. The rules set out by the Financial Conduct Authority (FCA) require every lender who operates in the UK to assess the affordability of the borrower before lending them any money. This is the reason why there is no such thing as a guaranteed loan and anyone offering guaranteed acceptance loans might not be operating legally or it might be a scam.

Can I get a payday loan without a credit check?

In short - no. No credit check payday loans do not exist in the real world and all UK lenders who are authorised and regulated by the Financial Conduct Authority (FCA) must perform a credit check before lending money. This is part of the affordability checks set out by the FCA and any lender who advertising a loan without a credit check is not operating legally in the UK.

Can I pay off a payday loan with a credit card?

Using a credit card to pay off a payday loan is not the best solution. You might be able to pay off a payday loan with a credit card, but this will hugely depend on the lender and whether they have this option available to borrowers. Most of the time the repayments are taken automatically from your debit card through a Continuous Payment Authority.

Where can I complain if I am mistreated or mis-sold a payday loan?

The first starting point would be to complain to your lender if you have been mistreated or mis-sold a payday loan. Every lender might have different complaint processes and handling procedures but you can so it's best to familiarise yourself with them first. Alternatively, you can use an online tool like https://www.resolver.co.uk/ to start the process too.

If the lender doesn't respond or the outcome is not satisfactory, you can complain to the financial ombudsman. They have a dedicated page that explains the process and answers the most frequently asked questions here.

What are the alternatives?

There are plenty of alternatives to payday loans today. Here at CashFlex, we specialise in flexible short term loans from £100 to £5000 with repayment terms from 3 to 36 months. They can be a great alternative to payday loans with much more flexible repayment terms.

What to do if I run into money trouble?

If you have an outstanding payday loan that has been passed to a debt collection agency, you may be worried about the implications. Here in the UK, failure to repay consumer debts will not result in a jail term.

As with defaults on other forms of credit, defaulting on a payday loan will impact your credit score as the payday lender will report to credit reference agencies. If you are concerned about your ability to keep up with loan repayments, there are a variety of impartial organisations that can help, including The Money Advice Service, Step Change, PayPlan, National Debtline, the Debt Advice Foundation and Citizens Advice.