Payday Loans
A payday loan can be quickly accessible credit in an emergency when there is no alternative. But of course, they are very expensive. Better budgeting and making ends meet is always preferable.
What is a payday loan?
A payday loan is a short term credit agreement to be paid back usually over a few weeks. Interest rates are very high and the overall cost of borrowing expensive, especially so if you miss payments.
The average payday loan is for £250, with the average repayment £430.
Borrowers repay 1.65 times the loan amount
According to a 2019 report from the FCA, there are over 5 million payday loans per year; which is over 100 per 1000 of the UK adult population.
The average interest rate in eye-watering 1,250%.
FCA price cap regulation
It used to be worse. The FCA (Financial Conduct Authority) regulates the UK lending market. In 2015 they introduced price caps with requirements for further affordability checks. Before this, the average interest rate was close to 2,000%.
One important cap is that the borrower must never be required to repay more than twice the initial loan amount. This cap includes any extra charges for missed payments.
Help – I can afford a payday loan
Contact your payday lender as soon as possible, by law, they must:
- direct you to sources of free and independent debt advice
- suspend recovery of the debt for a reasonable period if you tell them you have taken advice and are working on a solution
- treat you fairly allowing for a reasonable time to repay the loan which may include freezing interest and suspending charges.
Consider blocking the payments
If you’re struggling to pay for food, rent and other necessary costs, you can stop the payment by contacting your bank. Do this at least a couple of days before payment is due, and tell your lender you’ve done so. Note the times and dates of these conversations.
Important: If you’re relying on payday loans for day-to-day living costs – you may benefit some debt advice. A payday loan is an unsecured loan and is includable in an IVA like any other unsecured debt.
Alternatives to Payday loans
Budgeting Loans
These are available from the Government for people in receipt of certain state benefits, see gov.uk/budgeting-help-benefits for details.
You only pay back the amount you borrow. So, that’s 0% interest. Repayments are taken automatically from your benefits. If you stop getting benefits, you’ll need to arrange another way to repay.
Credit unions
A much more affordable alternative to a payday loan is a loan from a credit union. The amount of interest they can charge is capped at 3% a month or 42.6% a year APR.
Credit unions are owned by the people who use their services and not by external shareholders or investors. So the emphasis is always on providing the best service to members – not maximising profits. To find one local to you see findyourcreditunion.co.uk
Community development finance institutions (CDFIs)
Community Development Finance Institutions (CDFIs) are small independent organisations that offer loans to people who have been turned down by their bank or credit card company. They tend to be local organisations providing a personalised service that then reinvest any profits they make back into the community.
You can find an alternative lender, including CDFIs, near you using the Finding Finance website.
Guarantor Loans
A guarantor loan is borrowing money on the understanding that if you do not pay, someone else (the guarantor), becomes responsible for repayments.
Guarantor loans are typically cheaper than payday loans. This is because as the lender has two parties to chase for payment, one which usually has a decent credit rating.
Caution: Usually, guarantor loans are joint credit agreements by another name. Both parties (borrower and guarantor) are equally liable for 100% of the debt. If one party won’t pay or becomes insolvent, then the loan provider can go after the other party for payment in full.
Payday loans in an IVA
In an IVA, payday loans and debt from all other forms of short term unsecured credit are including as a creditor.
In the context of an IVA, debts are referred to as either an expenditure item or included as a creditor.
An expenditure item
When entering into an IVA, a calculation is made to determine your available disposable income. This establishes how to much you to have to pay towards your non-priority debts once you've paid for your living expenses, important obligations and priority debts. Your available disposable income is how much you pay into the IVA.
So, priority debts and other important obligations are said to be excluded from an IVA but are an expenditure item used to determine the IVA payments.
Included as a creditor
A creditor in an IVA represents a negotiable debt. It is these debts which are said to be included as a creditor in the IVA and cleared once the IVA completes.