What should I be aware of before applying for a payday loan?

There are many important factors that you should consider before taking out a payday loan to make sure you get the best guaranteed payday loan to help you in the short term.

As with other forms of debt, ask yourself why you are taking out a payday loan.  Is it for a very specific purpose?  What would happen if you did not borrow the money?  Are there other routes you could take to obtain a short-term loan, for instance, do you have family or friends that could help out?

Taking out a payday loan should only be used in an emergency situation and if there are no other alternatives available to you.  It can be very tempting to spend money foolishly especially if you are under pressure from paying money from previous borrowing and other financial commitments.  You will not only add more pressure to yourself you will also have a negative impact on your future credit score by continuously applying for loans and credit, making it more expensive to borrow in the longer term.

Be thorough when you are reading the marketing and information provided by the lender.  Take the time to understand the terms and conditions as well as the cost of the loan. Ensure that you can absolutely afford to pay it back to help you in the long run. This can help protect your credit score by avoiding the chance of defaulting on the repayments. Shop around for the best deal, there is a lot of competition from lenders, which means more choice for you.

Finally, before borrowing money from any lender, you will need to check if they have been approved and authorised by the Financial Conduct Authority (FCA). This will ensure you are protected against any unscrupulous lenders, so if anything goes wrong you are protected.

If you want to find out more information regarding pay day and business loans, you can read here:

Can you reclaim money for a mis-sold a pay day loan?

As part of the Good Practice Customer Charter and the rules that were imposed by the Financial Conduct Authority (FCA), the onus is on the lender to check your financial ability to pay it back. 

Take for instance that you earn £500 a month but the payday lender has borrowed you £2000, it would be obvious to anyone that you clearly would not have the ability to pay it back. The reality is that you would be put into a situation where you would need to borrow more money to try to pay back the original loan. 

Check the list below to claim the money back from a lender that you have an existing loan with or a loan that you paid back within six years of taking out the loan (any longer and you can contact the FOS to find out if you are still eligible for a refund), if one or more apply to you, then you may be able to request a refund.

Did the lender?

  • Make clear the total cost to repay the loan, for each £100 borrowed, including fees and charges?
  • Provide full and accurate information about the period and how and to pay back the money?
  • Sufficiently check your finances or ability to ensure you would be in a position to pay back the loan. Including your age, mental health, employment status, income, expenditure, proof of identity or financial history.
  • Was satisfied that a payday loan is not a long-term borrowing solution or check that you are in an existing dire financial situation.
  • Informed of the complaint procedure.
  • Did not make clear to you how making a series of deductions from your credit or debit card works and your right to cancel it within 14 days.
  • The CPA didn’t tell you in advance that it was going to take money from your account.
  • Failed to include a warning about the late repayment charges in their online/offline marketing materials.

Is the payday loan industry regulated?

Yes, in 2014 the Financial Conduct Authority (FCA) took over the regulation of the consumer credit market from the Office of Fair Trading (OFT). One of the first changes they made was to significantly reform the regulations within the payday loan industry. 

To protect consumers in the payday loans market, the FCA introduced several new regulations on interest capping, affordability, advertising, the use of recurring payments as well as roll-overs (a fee charged to delay loan repayment). If a payday loan company breaches these regulations, consumers can make an official complaint and possibly claim compensation.

Under the new regulations, payday lenders must now:

  • Carry out a comprehensive affordability check, prior to accepting a loan applicant
  • Limit the number of loan roll-overs to two
  • The maximum number of times a Continuous Payment Authority (CPA) can be issued to two
  • Adverts and promotions must have clear warnings on the risk of taking out a loan, including debt advice information

The FCA also implemented three major changes to the cost of high-cost short-term loans (HCSTC) to protect consumers from unfair lending practices, which are:

  • The maximum daily interest rate charged is 0.8% per day
  • Default fees capped at £15 to help borrowers from falling further into debt
  • Maximum cost of a payday loan capped at 100%, so customers will never pay interest that exceeds the initial loan amount borrowed

The FCA has also outlined the following six core outcomes in response to the Treating Customers Fairly (TCF) guidance:

  1. Customers can be confident that they are dealing with firms where fair treatment is central to the corporate culture
  2. Product and services marketed and sold in the retail market are designed to meet the needs of the identified consumer groups and are targeted accordingly
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
  4. Where consumers receive advice, the advice is suitable and takes account of their circumstances
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
  6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

If you are facing financial difficulties, contact your lender as soon as you can, to discuss the options available to you and to prevent further escalation of your financial commitments.

What is the procedure to issue a complaint against a payday lender?

If you have a current or historical complaint with a payday loan lender, you may be able to issue a complaint if the lender has not made an adequate affordability check, or has failed to recognise the borrower is in financial difficulty by their actions in:

  1. rolling over a loan for one or more successive months
  2. quickly taking out another loan, after paying the previous one
  3. delaying the repayments or defaulting
  4. extending, increasing, or taking out additional loans
  5. loan repayments adversely affecting priority bills

You can make also make a complaint against your payday lender if:

  1. your payday lender did not make the total cost of the loan and you were not given an example of the price for each £100 borrowed, including fees and charges
  • full or accurate information for the cost and method of the repayments were missing or inaccurate
  • the payday lender did not verify that you were in a strong financial position to pay the loan back, or your age, mental health, employment status, income, expenditure, proof of identity or financial history
  • the lender did not explain that this type of loan is for short term use only
  • the complaint procedure as not explained
  • the lender did not clarify how continuous payment authority (CPA) works as well as give you advance notice of when the deductions from your credit or debit card would be taken each month

late payment

What is the alternative to a payday loan?

There are other cheaper ways to borrow money other than using a payday lender. 

If you are borrowing to pay for priority bills and essentials you should first seek independent advice so they can help you work out a realistic budget, prioritise your debts, and help you to set up a repayment plan to people you owe money to.

However, if you still need to borrow money here are a few cheaper alternatives:

Advance on your pay

It may be worth asking your employer if they’ll give you an advance on your wages to see you through the month, but be aware this may create a knock on effect for the following month and you could find yourself in the same position.

Family and friends

Borrowing money from a family member or a friend can help you in an emergency and will be much cheaper than using a payday lender.

But you should consider the following advice, or you could put your relation in jeopardy:

  • Agree it in writing
  • Work out a realistic repayment plan and put a standing order in place
  • What is the plan if you cannot afford to pay them back?

Using an authorised overdraft

If you have a current account, and your credit is in good standing you can request an authorised overdraft from your bank.

Be careful not to get into an unauthorised overdraft, as this can lead to serious money problems and damage your credit rating.

Credit union

A much more affordable alternative to a payday loan is a loan from a credit union.  The cap on the amount of interest they can charge is 3% a month or 42.6% a year APR for England, Scotland and Wales, and 1% a month or 26.8% APR for Northern Ireland, so you can be assured that you will not be charged a higher percentage.