Payday loans – what you need to know
Payday loans are an expensive way to borrow. Never take out a payday loan unless you’re 100% certain you can repay it on time and in full – otherwise the costs can soon spiral out of control. If you’re thinking of getting one, here’s what you need to know.
How payday loans work
Payday loans are short-term loans designed to tide people over until payday. The money is paid directly into your bank account. Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period. On the repayment date, the lender takes the full amount you owe plus interest directly from your bank account. This happens even if you need the money to pay essential bills like mortgage or rent, heating and food. A payday loan will just make your situation worse if you can’t afford to pay it back on time. It may also affect your ability to get credit in the future.
What payday loans cost you
In the past, most payday lenders charged £25-30 interest per month for each £100 you borrowed. But this is if you paid the loan back on time. If you repaid late, they’d usually also charge a default fee of around £30 and daily interest on top. New rules introduced by the Financial Conduct Authority (FCA) from 2 January 2015 mean that borrowers will never pay back more than twice what they initially borrowed. This is to help address the problem of spiralling debts. Also, someone taking out a loan for 30 days and repaying the loan on time will pay no more than £24 in fees and charges per £100 borrowed.
There is also a cap on default fees. If you don’t pay your loan on time, the lender can charge you up to £15 in default fees plus interest on outstanding principal and default charge.
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