Payday Loans

What is a payday loan?

You may have heard a lot about payday loans online, on TV adverts, or mentioned in the news, but getting to grips of what they are can be tricky business.

Simply put, a payday loan is an amount of money lent to an individual with an expectation it will be paid back, with interest, soon after receiving it. This type of loan is designed to provide the borrower with instant cash to help pay off any outstanding bills before their next pay day.

How do payday loans work?

Payday loans are lent with the agreement that they will be paid back within a period of time that can range between a few days to several months. This type of loan is designed to offer instant financial relief, and the sum of money is usually paid into the borrower’s account within 24 hours of agreeing terms.

If you take out a payday loan, you can expect to have your repayments taken from your bank account via the use of Continuous Payment Authority (CPA) – a permission you give to a business to take money from your debit or credit card as and when is required.

Payday loans are usually advertised with annual percentage rates (APR) of up to 1500%, but you will never pay back more than twice the amount you initially borrowed thanks to ruling from the Financial Conduct Authority. 

Are payday lenders reputable?

Most payday loan companies are members of a trade body, and it’s worth checking to see if the one you intend to choose is. Lenders are likely to be members of one of the following bodies:

• The Finance and Leasing Association (FLA)
• Consumer Finance Association (CFA)
• Consumer Credit Trade Association (CCTA)

If the payday lender of your choice is part of a trade body, this is a sign that they are committed to learning more about their own industry and therefore more likely to offer its customers more informed and reliable information. Trade body members are more likely to stick to set laws that are for the benefit of providing better service for customers.

If you have difficulty in paying your payday loan back, it is worth knowing that payday lenders are likely to adhere to a shared customer charter which requires its members to:

• Deal sympathetically and positively

• Freeze interest and charges if:
  • The customer makes repayments under an agreed/reasonable repayment plan or
  • After 60 days of non-payments

If you do find yourself struggling to repay your payday loan, check with your lender and ask for advice. It’s better to tackle the problem head-on, rather than struggle in silence.

What is Continuous Payment Authority (CPA)?

CPA is a type of recurring payment, similar to a direct debit, where you give permission for a company (such as a payday loan lender) to take money from your account on a regular basis. The CPA gives the company permission to take payments whenever they want and take payments for different amounts, without consulting you beforehand.

How does it work?

• You give your debit or credit card details to the payday lender via phone, in person or online
• There’s unlikely to be any written record of authority being given
• The money is automatically taken and advance warning does not need to be given

Continuous Payment Authority payments are favoured by many other organisations including insurance companies, gyms and internet providers.

How can I cancel a Continuous Payment Authority?

It is your right to cancel a CPA directly with your card issuer if you are struggling financially. To do so, choose one of the following options:

• Contact the company taking the payment and ask them to stop
• Contact your card issuer/bank and cancel. They must do so immediately

It’s recommended you let the creditor know that you are withdrawing your continuous payment authority but to let your bank know as a priority to stop the payments going out. You will need to ensure that you make a payment to the payday lender however, based on what you can afford.

You’ll need to complete an income and expenditure form and send this with a list of any other unsecured creditors you owe to, and make an offer of payment based on any leftover income you have. If your living expenses exceed your income, then a token payment is required to show willingness to make continued payments.

Is a payday loan the best option for you?

Before you consider taking out a payday loan, consider whether you can afford to repay the loan on payday and whether the wages you will be left with are enough to cover the essential household costs you have to pay, such as your mortgage or rent, all the utility payments and food shopping for the week or month.

If you’d like to talk to someone about your money worries, please contact our Advice Team on 0800 316 1833 and they will be happy to offer free and impartial advice.