Payday loans: 10 things you should know before you take one
If you're under pressure to pay your bills, borrowing a small sum of money for a short period can seem like a good solution.
However, before you're tempted to take a payday loan, make sure you know what you are getting into.
Here are 10 things to think about before you take the plunge.
1. Interest rates are very high
Payday lenders have to publish an Annual Percentage Rate (APR). This would be the interest you would have to pay if you were to borrow the money over a whole year. 5000% or more is not unusual!
Payday lenders say APR is not the best way to measure short-term loans and quote alternatives like "1% per day" instead.
This sounds cheap until you realise that in about 3 months, you would owe double what you borrowed and there will also be charges for paying late.
2. Lenders get access to your bank account
Most pay day lenders collect repayments from your debit card. These "continuous payment authorities" (CPAs) allow lenders to take payments from your bank without checking with you first.
Though they are quick to set up - online or over the phone - they can be hard to cancel. This can make it difficult to manage your finances.
3. You have a right to cancel payments
Since November 2009, your bank MUST cancel any CPAs on your card if you ask them to. Just tell the bank the name of your lender.
If the bank makes any payments after you cancel, they must refund them to you.
4. What about the bank of mum and dad?
Before considering a pay day loan, talk to friends and family. Can one of them help you out with a short-term loan, paid back maybe in a few instalments?
5. Other lenders may be a better bet
- 400 in the UK
- Lend £620m a year
- Owned by members
- Limited availability
- Don't all offer payday loans
- Regulated by FCA/PRA
Many other lenders like banks, building societies or credit unions may be able to help you if you need to borrow money.
They will also help you spread out the payments to make it affordable.
Credit unions offer loans particularly suitable for people borrowing small amounts or for those with lower credit ratings.
6. Payday loans are only for very short periods of time
A payday loan is just that - money to borrow until the next payday, repaid in one chunk.
According to the Office of Fair Trading 30% of borrowers don't pay back on time and 'roll over' the loan - borrowing the same amount of money again and just paying off the interest.
Doing this again and again means you keep paying interest without paying back the money you borrowed to begin with.
7. Look before you loan
It's important to make sure that you know exactly how much you will need to pay back in total before you apply for the loan.
Some lenders make it easy to see how much the total cost of your loan will be over the time you are going to borrow it.
Our payday loan interest calculator can help you work out exactly what you'll end up paying.
8. Make sure you can afford to pay back
Lenders should make sure you can afford their loan, but the Office of Fair Trading says many are not doing proper checks.
It's up to you to make sure you really can pay it back when you need to. Do a budget by writing down what money you have coming in and what you will need to pay for.
If the budget shows you can't pay back, think about how else to make ends meet.
9. If you don't repay, you may be pestered or intimidated
If you don't pay on time lenders will want to contact you to find out what the problem is.
Some lenders may contact you repeatedly chasing payments.
The Office of Fair Trading found cases of consumers being bombarded by calls at work - sometimes up to 16 times a day - during its review of payday lenders.
10. Loans are quick, but customer service can be very poor
Loans are granted sometimes within 10 minutes, but the Financial Ombudsman says it receives more than 50 complaints about payday lenders every month - with 3 out of 4 being upheld.
Many complaints are about money being taken from debit or credit cards without permission, or just about unfairness and poor customer service.
When borrowers can't pay back, the Office of Fair Trading says lenders should consider freezing the charges or offering a repayment plan. If you can't repay your loan in full when you're supposed to, ask your lenders if they can do this for you.
Young, British and Broke: The Truth about Payday Loans is broadcast on BBC Three on 3 December 2013 at 21:00.