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When taking out a payday loan, the loan provider will take your payment account details and, once the repayment date comes around (usually by the end of the month or the following payday), they will automatically take the payment from your account.

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A payday loan is a financial agreement intended to be taken out and repaid by, well, payday. It is a short-term loan intended to provide quick financial relief when needed. Though a payday loan can be a useful solution for unforeseen situations or temporary money troubles, when used poorly they can create continued debt for those unable to make repayments.

Considering a payday loan?

If you’re considering a payday loan, there are a couple of things you should consider before you proceed.

It’s important to know that there are strict rules on payday lending and what rates can be offered to customers.

InterestInterest rates attached to a payday loan cannot exceed 0.8% meaning lenders can only charge 8p for every £10 per day.
Default chargesDefault charges for late payments should not exceed £15.
FeesBorrowers should never have to pay back more in fees and interest than the original loan amount.
TransparencyPayday loan providers must post their rates on at least one price comparison site that is regulated by the Financial Conduct Authority (FCA).
EligibilityPayday loan companies must determine if you’ll realistically be able to repay the loan amount being requested before allowing a loan application to go ahead.

Is a payday loan a good option for repaying debts?

Though each scenario is different, it’s generally not advised to use further credit to deal with current debts. Though it may offer momentary relief from your debts, ultimately, if you are still unable to repay you will likely end up in the same (or a worse) scenario once it’s time to make payments.

Instead, if you are struggling to repay debts you should look into options such as benefits, grants and debt advice rather than taking out further credit with a payday loan.

You can check your eligibility for benefits you may be entitled to through Turn2Us, a UK charity created to help people receive any benefits they may be entitled to.

You can also check your eligibility through the GOV website using their benefits calculator.

For grants, you can look into any local council financial schemes or any packages being offered by your service provider.

Finally, if you’re struggling with unaffordable debts it’s important to reach out to get debt advice as soon as possible. It’s important to remember that help is available and speaking to a debt advisor can be the first step in helping you get free of your current debts.

What is a payday loan debt?

Payday loans are intended to be short term credit agreements taken out and repaid within the same payment window as when they were taken out. If you’re unable to repay the full amount of your payday loan, like most debts you’ll incur late payment fees and arrears that could land you in further debt than before you took out the original payday loan.

Remember each type of debt is different and can have different implications and repayment requirements, so it’s important to make you understand your current debts.

Do payday loans affect your credit score?

The effect that taking out a payday loan will have on your credit score can vary depending on the lender. Though some payday lenders may only run a soft credit check which initially won’t affect your credit score, this isn’t always guaranteed. Taking out a payday loan can appear on your credit history (dependent on the credit reference agency) which can be viewed when a hard credit check is run on you for future loans and credit. Loan providers may factor this in when deciding if you are creditworthy for future loans or financing agreements.

Furthermore, once a loan application is placed this will cause a temporary reduction to your credit score. Any loan applications made on your account will have an effect when a new credit account is added to your profile.

Can I take out a payday loan with bad credit?

Though your mileage may vary, as each payday loan provider is different, getting a payday loan with bad credit will likely be more difficult as some loan providers will be unwilling to take the added risk of issuing a loan to you.

However, that doesn’t mean it isn’t possible and you may still be accepted, so it’s worth keeping in mind that due to your poor credit score you could be offered less agreeable repayment rates or higher interest in order to get your payday loan approved.

There are loan providers who specialise in issuing loans to people with poor credit, however, as is to be expected the above applies and the rates you are offered may be higher as a result of the added risk to the loan provider.

What if I can’t afford my payday loan repayments?

When taking out a payday loan, the loan provider will take your payment account details and once the repayment date comes around (usually by the end of the month or the following payday), the payday loan provider will automatically take the payment from your account. This is known as continuous payment authority (CPA).

If you’re unable to make payment for your loan by the following payday, you may be able to extend the loan date. This is known as a loan rollover and allows you to defer the payment to the following month. The current rules ensure that lenders cannot do this more than twice for a loan.

If you’ve been unable to repay your payday loan, your provider will begin to attach late fees. After this, your debt will go into arrears and eventually default. Once a debt has defaulted it will typically be passed over to a debt collections agency for retrieval of the outstanding amount, alongside any additional fees and payments attached by the debt collection agency themselves.

Debt collection agencies will initially start proceedings with letters and calls but can escalate to home visits from debt collectors. Debt collectors and bailiffs are actually very different; it’s important to remember that only bailiffs have the legal right to enter your home.

If debt collection agencies are unable to retrieve the debt, they will seek court action against you. This is known as a County Court Judgement (CCJ) and means you can be ordered by a court to repay your debt. At this point bailiffs can be sent to recover possessions in order to try and repay your debts.

It’s important to take control of your debts before collection efforts reach this point.

Can I get help with my payday loan debt?

While all of this can sound scary, it’s important to remember that there are many steps that need to be taken before debt recovery can reach this point and there are a lot of options to help those struggling to take control of their debts.

Breathing Space

If your payday loan debts are getting on top of you and you need time to plan how you’ll repay them, you may be able to apply for a government Debt Respite Scheme. The Breathing Space scheme was launched in 2021 to provide assistance for those struggling with problem debts. It allows you a debt grace period of up to 60 days to help you get back on your feet. Additionally, if you’re experiencing significant mental health concerns, you may be entitled to a longer grace period.

Here’s how the Breathing Space scheme works:

Standard Breathing Space:

Breathing Space is a debt respite scheme that stops you from having to make payments towards your debts for up to 60 days. During that time, you’re also legally protected from your creditors, which means they can’t make any kind of contact with you. Breathing Space is available to anyone who hasn’t previously entered the scheme in the last 12 months.

As the name suggests, Breathing Space relieves immediate pressure, helping you to get in control of your repayments and make a suitable financial plan for the future of your debts.

Mental Health Crisis Breathing Space:

This version of Breathing Space is designed to provide extra support to individuals who are receiving professional treatment for severe mental health conditions. It helps those in vulnerable positions by affording them enhanced legal protections against their creditors, as well as providing more time to allow them to create a debt repayment plan.

If you qualify for Mental Health Crisis Breathing Space, the protection will remain in place for the full duration of treatment, plus an additional 30 days. This is the case regardless of the length or nature of your treatment.

Applying for this kind of Breathing Space will require you to provide, alongside your application, evidence of treatment from a qualified mental health professional.

Breathing Space is a useful option if you feel that constant creditor contact is affecting your ability to repay your debts and impacting your mental health overall. The government scheme gives you a grace period in which to concentrate on planning your future finances to pay off your debts, without also having to worry about keeping up with your repayments at the same time.

Seek professional payday loans debt advice

Finally, if you’re struggling to repay your payday loan debts, you should seek professional debt advice as soon as possible.

By contacting a debt advisor, you can get a full breakdown of all your current debts against your finances, assessing your current financial situation and giving you the best advice on options for repaying your current debts.

Consider if a debt solution is the right option for you:

If you believe your payday loans debts are no longer manageable and you have no feasible way to pay them back, you can ask a debt advisor to assist you with implementing a debt management solution. Debt management solutions are financial agreements intended to provide help those having difficulty with repaying their debts.

Depending on your specific situation, there are a number of different debt solution options which may be suitable for you. These include:

Individual Voluntary Arrangement (IVA): Covering those who live in England, Wales and Northern Ireland, an IVA is a type of formal debt solution that consolidates your various debts into a single, affordable monthly payment. You would make this monthly repayment for a set period of time, typically around 5 to 6 years, before any remaining debt would be written off. It’s important to keep in mind that an IVA is a legally binding debt solution, so once you enter into one, it’s vital that you keep up to date with your monthly payments towards your overall debt.

If you live in Scotland, an IVA is not available to you. The equivalent in Scotland is a Protected Trust Deed. Created for those with debts of more than £5,000, this is an alternative to insolvency which typically lasts for a period of 4 years.

Debt Management Plan (DMP): An informal debt solution, a DMP is an agreement designed to let you make repayments towards your debts at a more manageable rate over a longer time period. A DMP is mutually agreed upon between you and your creditors, and will specify your repayment amount and the time frame for full repayment of your debts, based on what you can afford to pay.

For more information on the different debt solutions currently available head over to our debt solutions page to learn which options may be the best for your financial situation.

For free debt advice from a professional debt charity, you can visit MoneyHelper.

To learn more about MoneyPlus and the service we provide, click the button below.

You can read our blog all about the pros and cons of a payday loan here.

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