In recent times, there has been a significant increase in clients facing severe debt issues, largely due to payday loans. While we do not condone the use of payday loan companies, we understand that in some circumstances, a short-term loan, paid back on time, might be the only option available.

What are payday loans?

Payday loans are small, short-term loans designed to help you to your next ‘payday‘. Payday loans are an American phenomenon that have been growing quickly in the UK market since 2006. The premise is that they offer a relatively small amount of cash (usually between £50 to £1,000) for a short term, usually around a month.

What is the APR for a payday loan?

Payday loans are relatively easy to obtain, but their interest rates are significantly higher than those of other forms of credit, often reaching an APR (Annual Percentage Rate) of 1,500%. Typically, you are required to repay a payday loan on your next payday, though some lenders may offer flexible repayment options. Payments are usually collected via direct debit, so it’s important to ensure you have sufficient funds in your account. If you miss a payment, additional charges can accumulate rapidly, meaning your debt will increase.

Regulations and consumer protections

In the UK, payday loan companies are regulated by the Financial Conduct Authority (FCA). Key regulations include:

• Cap on costs: The FCA has imposed a cap on the cost of payday loans. Borrowers must not pay more than 0.8% per day of the amount borrowed.
• Default fees: Default fees are capped at £15.
• Total cost cap: The total cost of the loan must not exceed 100% of the amount borrowed. For instance, if you borrow £100, you should not repay more than £200 in total.

Key considerations before taking a payday loan

It’s important to assess whether a payday loan is genuinely necessary. Are you taking a loan out to buy something you need or something you want? Explore alternatives such as borrowing from friends or family, using savings, or negotiating a payment plan with creditors. Here’s a list of some other things to consider:

• Understand the terms: Ensure you fully understand the repayment terms, including the amount to be repaid and the due date.
• Shop around: Compare different payday loan providers to find the most favourable terms.
• Seek advice: If you’re struggling with debt, consider seeking advice from financial advisors or charities like MoneyHelper who can offer support.

While payday loans can provide quick access to cash in emergencies, they come with high costs and significant risks. It’s crucial to understand the terms and implications fully and consider all alternatives before committing to a payday loan. If you do decide to take out a payday loan, ensure you have a solid repayment plan to avoid falling into a cycle of debt.

Remember, financial advice and support is available if you need help managing your debt and exploring other options.

If you’d like to speak with one of our friendly team, you can contact us via an online form.