What to Know
Payday Loans Survey
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10 must-know facts about payday loans
The payday industry profits from the vicious debt cycle.
The 28% of loans that are rolled over or refinanced at least once provide 50% of the payday industry’s revenue.
Even though it may seem sensible to pay a £25 penalty to delay the repayment until the following month, if you can’t repay next month, you will incur another £25 penalty. Continually rolling over your loan can end up costing many times more than the original loan.
Four out of every five payday loans are used to buy food.
According to Christians Against Poverty (CAP), 80 per cent of the people who seek payday loans are driven to do so in order to buy food.
This latest research further confirms that payday loan providers are profiting from the most vulnerable segments of the population.
Payday loans are becoming worse over time.
From 2008-2011, the number of complaints to the OFT regarding payday loans increased by 2529%.
During this time period, the number of payday loans taken out only increased by approximately 144%. StepChange, a leading debt management organisation, also saw a 109% increase in the number of their clients with payday loans during the same time period.
Payday loans can be over 100 times more expensive in the UK.
Some UK payday lenders have representative APRs of over 5,000%.
In comparison, certain regions in Australia have a 48% APR cap on loans, including fees and brokerage. Japan also placed a 29.2 per cent cap on interest rates in 2000, and in 2006 established a 20 per cent cap on all loans up to 100,000 yen, and a 15 per cent cap on loans any larger.
The chance of paying the advertised rate is slim.
One in three payday loans are repaid late or not repaid at all.
This often leads to rollovers, and borrowers accruing numerous fees and penalties on top of the original interest. To make matters worse, a sizeable amount of payday loans are paid through a continuous payment authority (CPA), which allows payday loan companies to withdraw money from an account whenever they believe they are owed money. This can be especially precarious for those already in debt.
Payday loans are not a viable way to rebuild your credit score.
Some payday lenders claim that successfully paying back the loan will increase your credit score.
While successfully paying back a payday loan on time may increase your credit scores from the credit rating agencies, it does not always have a net positive effect on your ability to borrow. Most lenders use your credit score as an initial baseline to gauge your credit worthiness, but use many subjective factors to determine your credit suitability. Some mortgage lenders have even said that any applicant who has used a payday loan will be automatically rejected, even if the loan was fully repaid on time.
There are many cheaper alternatives to payday loans.
The average cost of a £100 payday loan taken out for a month is approximately £25.
Borrowing £100 on a 20% APR high street credit card for one year would cost approximately £20. You can also take out a loan from a credit union which has an APR cap of 26.8%, but in practice, the majority of credit unions charge around 13% APR.
Assume lenders are not performing affordability checks on your loan.
According to a tracking service run by Citizens Advice which examined approximately 2,000 payday loans across 113 lenders, 87% of lenders did not ask the borrower to provide sufficient documentation that showed they could afford the loan.
This is especially alarming when you consider that the OFT ‘Lending Guidance’ advises lenders to perform “appropriate assessments of affordability, prior to making a credit agreement with a borrower.”
Payday loans are proliferating at an alarming rate.
In 2011, there were more payday loans taken out than people living in London.
The 8.2m loans taken out in 2011, equated to an approximately £2.2bn industry. This is up from £900m in in 2008, roughly a 144% increase.
Perception of choice is largely an illusion.
Three lenders account for more than half the market by turnover and loan value.
Even though there are approximately 240 lenders operating in the market, a large portion of borrowers will be subject to the policies and practices of just three lenders. This is especially when you consider that the OFT found widespread evidence of irresponsible lending across numerous payday firms.
Payday loans are high interest, short-term, unsecured loans that are meant to holdover a borrower until their next payday. They generally range from £50 to £1,000, and are typically taken out for 30 days.
The amount of interest that payday lenders can charge is uncapped by law, which means that the APR (annual percentage rate) on a payday loan is very high compared to other types of loans, with some lenders charging an APR of more than 5000 per cent. In comparison, certain regions in Australia cap the APR on payday loans at 48 per cent. Japan also has a 20 per cent interest rate cap on all loans up to 100,000 yen, and a 15 per cent cap on all larger loans.
Applying for a payday loan
If you are over 18 years old, have a bank account, and are employed with a consistent monthly income you may be eligible to receive a payday loan.
Most Brits get their payday loans either from lenders on High Street or from online lenders. With online lenders, the process has become quick and effortless, with many lenders not requiring any faxes or post.
The typical payday loan process involves:
- Fully filling out the application form with all of your pertinent details.
- Sending your banking details to the lender, upon receiving approval.
- Signing a contract that stipulates the terms of the loan and the interest you will be charged.
- Receiving the funds in your bank account within a few hours to a few days, depending on the efficiency of the lender.
Depending on the policies of the lender, a borrower can use one of three repayment schemes:
Continuous payment authority (CPA)
CPAs are the most commonly used repayment method for payday loans, but can also be the most detrimental to the financial health of the borrower. In a CPA, the borrower provides the lender with their debit or credit card details and gives the lender permission to take money from their account at the lender’s discretion. Often, if the borrower does not make full repayment, the lender will keep trying to collect partial payments until the entire outstanding balance is recovered. They also have the power to go after the money of any friends or family that have agreed to pay back a portion of the borrower’s balance.
A standing order is an instruction to the bank to pay out a fixed amount at regular intervals, and can be cancelled at any time.
A direct debit is an arrangement where the borrower allows the lender to take money from their bank account for a fixed or variable amount. A direct debit can also be cancelled at any time, but has the added benefit of the ‘Direct Debit Guarantee.’ This guarantee ensures that if there is an error in the payment of a direct debit, the borrower’s bank will provide them with a full refund.
Whenever possible, a borrower should opt for a standing order or direct debit over a CPA. CPAs afford the borrower a lot less control over their finances. Allowing a commercial lender the ability to randomly swoop in and diminish your bank balance can be perilous, especially if you are already struggling to pay your bills.
What happens if the loan cannot be fully repaid?
If the borrower is unable to fully repay their loan, they are almost always charged a late payment fee of around £10 to £20. The loan will also accrue additional interest until the outstanding balance is cleared in full, typically at the rate of 1% per day.
Many lenders also allow the borrower to ‘rollover’ the remaining balance on their loan into the following month, provided they pay back the principal amount and any additional late penalties. Rollovers are not without risk, however, as simply taking out one rollover is often equivalent to doubling the amount of interest owed on the loan. If the borrower has some money in their bank account, but they need it to pay for priority bills, such as a mortgage, they can stop the payday lender from withdrawing money from their account. The borrower simply needs to contact the bank and ask for the CPA, standing order, or direct debit to be removed. The Payment Services Regulations gives borrowers the legal right to withdraw their permission for a payment directly from their bank, without having to first notify the lender. If the borrower thinks they will be unable to pay back the loan, they should contact their lender immediately. Being proactive in the repayment process should increase the likelihood of the lender working out a more favourable repayment schedule, as well as reduce the likelihood of the case being passed onto a debt collection agency.
How can a borrower deal with aggressive debt collection?
Under the Financial Conduct Authority’s rules, all payday lenders must “treat borrowers fairly and with forbearance if they experience difficulties.” The lender also must complete thorough affordability assessments, give borrowers “reasonable” time to repay their debts, limit the number of times a loan can be rolled to two times, and at the point of rollover the lender must direct the borrower to debt advice provided by the Money Advice Service. If the lender is treating the borrower unfairly and is not adhering to the FCA’s rules, the borrower should send the lender a letter outlining their reasoning. If they do not respond in a timely and satisfactory manner, the borrower has recourse with the Financial Ombudsman Service, which possesses the legal authority to settle disputes between creditors and borrowers.
The borrower may also want to check if their lender is a member of a trade body. Many trade bodies require their members to adhere to charters that have strict rules on how members can treat their customers. Some of the largest trade bodies that many payday firms are a part of are the: Consumer Finance Association, Finance and Leasing Association, Consumer Credit Trade Association, and BCCA.
Many charters require lenders to treat those in debt with sympathy, be transparent about the payday loan process, and limit fees and penalties if a reasonable repayment plan has been agreed upon. If the borrower believes that their lender has violated any rules of their charter, they may be able to lodge a complaint with the trade body, which may result in the lender working out a more favourable repayment plan.
Should I take out a payday loan?
Before you even consider taking out a payday loan, you should ask yourself four simple questions:
- Do I really need it?
- Am I debt free?
- Can I afford it?
- Have I looked into other cheaper alternatives?
If you have answered no to any of these questions, then you should probably not take out a payday loan. Payday loans are very expensive and are difficult to repay in the best of circumstances.
The desperation of those in debt, coupled with the speed and ease of payday loans, causes many borrowers to prematurely abandon seeking out alternatives. They mistakenly assume that their poor credit will cause them to be shut out by banks and other financial institutions. While their poor credit may make some of the following alternatives more difficult to obtain, any of these options should be drastically cheaper than a payday loan.
Most people do not realise how many non-essential expenditures they make.
Often, simply creating a comprehensive budget can help make these expenditures more apparent. This should allow you to save the money that you would otherwise have taken out a payday loan for. Even if it doesn’t save you enough, it will certainly make paying back your debt easier.
Sell old stuff
You may be surprised how much forgotten stuff you have accrued over your life.
Instead of taking out a loan, you should consider rummaging around your flat for items that you can sell on eBay or other related websites. You might be surprised at how much your old stuff is worth to others!
You can ask your employer for an advance on your salary. If your employer is uncomfortable with this, you could ask for overtime to temporarily increase your pay.
Ask family and friends
Consider asking your friends and family for help.
Even though it may be an embarrassing and tricky situation, they are always there for you. Sometimes even talking about your debt problems can be a huge relief and provide you with some much-needed clarity.
Another option is to ask a close family member or friend, who has a good credit score, to consider any of these alternatives and take out a debt obligation on your behalf. Of course, the debt would then be legally theirs and not yours.
You should always ask any family member who is assisting you, if they want the loan to be consummated formally. This may make both parties feel more comfortable and can be easily achieved by simply writing down the loan amount and terms on a piece of paper.
Ask your bank for an authorised overdraft
While under-utilised, an authorised bank overdraft is often a more affordable alternative to a payday loan.
Most banks will allow their customers the ability to overdraft, provided an agreed upon interest rate is charged. However, you must be careful to avoid an unauthorised overdraft, as the added fees you incur (an administrative charge, an arrangement fee, and interest charged) often dwarf the APR rates on a payday loan. If you decide to use an authorised overdraft, you must be careful with this option since a bank can take away your overdraft at any time.
Utilise local credit unions
Credit unions are not-for-profit community-based organisations that offer numerous financial benefits to their members, including loans.
They offer loans at reasonable APRs to their members, especially those with poor credit history and debt problems. APRs typically range from about 10 per cent to 30 per cent on a credit union loan. You can search for your local credit union through ABCUL.
Use a credit card
Credit cards are almost always a cheaper alternative to a payday loan.
If you currently have a credit card, and even if you don’t think you will be able to repay your outstanding balance, you should use it instead of a payday loan. The only exception is if you are already at your credit limit. If you go over your limit, you will either be declined or charged a £12 fee, which is almost as expensive as the payday loan.
If your current credit card is at its limit, you may want to consider taking out another credit card. Depending on your credit, you may be eligible for a 0 per cent card or you may have to opt for a poor-credit credit card, which still have APR rates that are many times less than a payday loan.
Explore entitlement benefits
Due to the complex nature of the benefits system in the UK, many consumers are unaware of the benefits they may be entitled to.
If you are pregnant, on a low income, caring for someone, undergone bereavement, are 60 years or older, ill or disabled, or unemployed then you may be eligible for a range of benefits. Use GOV.UK’s Benefits adviser tool to ensure that you are claiming all the possible benefits you are entitled to by law.
Check for grants and support
Many Brits are also unaware of numerous grants and support schemes that they can use.
If you were considering a payday loan to pay for the arrears on your gas, electricity, or water bills you should contact your utility company. Many utility companies offer support schemes to help their struggling customers. You should inquire with your specific utility company for more information.
There are also many grants that are available from grant-giving charities, depending on your circumstances. To find out if you qualify for a grant you should use the Turn2us grants search, which contains thousands of grant listings.
Over the past decade, there have been many instances of financial firms and even the government unfairly taking cash from people.
You may be entitled to reclaim £1,000s of pounds. For detailed information on all types of reclaims, check out MoneySavingExpert’s reclaim page.
Explore a budgeting loan from the government
If you’ve been getting income-related benefits for at least 26 weeks, you may be eligible for a budgeting loan from the government.
If you decide to take out a budgeting loan, you must borrow at least £100. The government will give you 104 weeks to pay back the loan, interest-free. The budgeting loan will cover essential expenditures, such as rent, furniture etc.
How to make a complaint
Write to your lender
The first step is to alert your lender to your complaint and see if they will work things out with you. Only after you complete this step will you be able to take the complaint further, if necessary.
Your letter should state all of the ways you believe your lender has failed to follow the Good Practice Charter, how you would like your lender to address your issues, and your idea of a fair repayment agreement.
If your lender fails to respond to your letter or does not resolve your issues, you may then complain to the Financial Ombudsman Service (FOS).
Submit your complaint to the Financial Ombudsman Service (FOS)
If your lender has not responded to your letter or resolved your problem after eight weeks have elapsed, you may submit your complaint to the Financial Ombudsman Service (FOS). You may only submit your complaint if it has been 6 months or less from the end of this eight week period, or if it has been 6 months or less since your lender sent you their decision regarding your issue.
The FOS is able to open a formal investigation into your issue and your lender is required to adhere to their decision. However, if you are unhappy with their decision, you still have the option to take your lender to court (see step 3).
To submit your complaint to the FOS, download their complaint form at http://www.financial-ombudsman.org.uk/consumer/complaints.htm.
Take your lender to court
Your final option if you are unhappy with your lender’s response and the decision made by the Financial Ombudsman Service is to take your lender to court. This should only be used as a last resort after you have sought advice and exhausted all other options.
According to StepChange, 45% of UK citizens wait more than a year before asking for help with their debt problems. Do not fall into this group and let your debt problems spiral out of control. The following organisations are dedicated to helping those in financial distress and have a proven track record in reducing the debt of their users:
StepChange Debt Charity
For a more comprehensive list of general debt services, feel free to browse our helpful organisations page.