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Payday loans can seem like a good solution to short-term money issues. You can get small amounts paid straight into your account in a matter of hours, which can seem very appealing. It almost sounds too good to be true. 

Often preying on those with low incomes, payday loans charge exorbitant rates of interest and leave many in a cycle of crippling debt; which leads to paying much more than the amount originally borrowed.

Indeed, there’s been a lot of controversy in the media regarding payday loans, with many politicians calling for stronger regulations and greater restrictions. Many payday loan providers have been accused of lending greater sums than their clients can afford to pay back.

How to Spot a Payday Loan

Spotting a payday loan is fairly easy. Many providers of short-term, high-interest loans will explicitly advertise that they offer services to those with ‘poor credit’; which only goes to support the view that these lenders target the financially vulnerable. 

But the main two warning signs that you might be looking at a payday loan are; high interest rates and short terms of repayment. If the representative Annual Percentage Rate (APR) is above, or even anywhere near to, 1000%, and you have around 30 days to make full repayment with interest, then it’s probably a payday loan. 

For example:

You borrow £200 which has to be repaid in 30 days. The total repayment amount is £250. This gives you a representative APR of around 1500%. 

Are Payday loans regulated?

Years of public outcry has mobilised the government into introducing several pieces of legislation, to reduce the potential consequences of payday loans. As of January 2015, the maximum amount of relative interest that can be charged is 0.8% per day (relative). There is also a £15 cap on payment default charges. 

Furthermore, the Financial Conduct Authority (the body that regulates the financial services industry) has performed several investigations on payday loan companies, leading to several millions of pounds worth of fines and customer refunds. 

The Alternatives

Now that you know how to spot a payday loan, you should approach with caution. They do have their uses, if for example you need a quick injection of cash to pay for an unexpected emergency such as a new boiler and you can afford to pay it back when you get paid. However, if you’re already struggling with debt, borrowing to pay back existing debts can lead to it quickly spiralling out of control.

A good first step is to try and get a handle on your existing finances if you have debt. Draw up a budget and see if it’s possible to make the money you already have coming in go further. You can also contact a debt management service, who will draw up a budget for you and potentially provide access to debt management products such as IVAs to make any problem debt much more manageable.

Get in touch with us

At PayPlan, we have a wealth of experience in all kinds of debt and we know how quickly it can spiral from ‘affordable’ to ‘terrifying’.

Our team will be able to give you advice on your issues and the potential solutions – with no judgement, hidden fees or other nasty surprises. Whether your problem debt is because of a payday loan disaster or some other financial difficulty, our advisers help people just like you every day.