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Understanding Payday Loans

What are Payday Loans?
They are short-term loans especially designed for those who are struggling to meet their financial obligations before their next payday. Online payday lenders include Cash window, Quickquid.co.uk and Paydaybank.

Payday loan companies such as Wonga.com provide repayment options instead of repayment on payday only.

Typically, a payday loan is paid into your bank account within 24 hours of approval. The payday loan repayment, including interest, is debited from your bank account on the agreed date. Interest rates are around £25 per month for £100 borrowed.

What is a Customer Charter?
If a payday loan company is a member of one of the main trade bodies, such as the Consumer Finance Association (CFA), the Finance and Leasing Association (FLA), the Consumer Credit Trade Association (CCTA) or the BCCA, they will have signed up to a Customer Charter which requires members to:

  • Deal with cases of financial difficulty sympathetically and positively.
  • Tell you how the loan works and the total cost of the loan (including an example of the price for each £100 borrowed, together with fees and charges) before you apply.

Freeze interest and charges if you make repayments under an agreed and reasonable repayment plan, or after a maximum of 60 days of non-payment.

Are there any Problems with Payday Loans?

  • Disproportionate charges: Late payment fees are around £20 which is almost double the total cost of a £100 loan.
  • Lack of transparency: Fees aren’t always displayed clearly in a way that can be properly understood. Many borrowers pay more than the rate initially advertised.
  • Insufficient affordability assessment: Loan providers should make sure that the agreement is suitable and that the borrower can afford to repay.
  • Consumer Transparency: Consumers don’t always reveal their total financial commitments in assessments which could lead to obtaining more credit than they can afford to repay.
  • Use of rollovers: Borrowers are encouraged to extend the term of their payday loan, often for several months, which increases overall interest paid.
  • Unsolicited offers of additional borrowing: Loan companies tempt consumers to borrow more at a time when consumers should be trying to focus on resolving their money management difficulties in more productive ways.
  • Unfair treatment of struggling customers: Some lenders charge interest for the first 60 days after a customer defaults. Charging interest on top of penalty fees for late payment may lead to more financial difficulty for the struggling borrower. A better option would be for high cost loans to involve no charge beyond 30 days after a borrower defaults.

Learning to live within our means and saving for a rainy day gives peace of mind and protects us from unwanted debt. In this way we can avoid the need for most loans, especially payday loans.