Payday or paycheque loans are short-term loans that you get in return for your pay cheque or proof of your income.
They are part of a wider form of credit referred to as High Cost Short Term Credit (HCSTC). They are cash advances on the wages you are expecting and are available online and on the high street. Loans are usually for a few hundred pounds and they have to be repaid on a certain date, which is normally your next payday. To arrange a payday loan, you will either authorise a direct debit from your bank account, which will be deducted when you get paid, or post-date a cheque which the payday lender cashes on the date the loan is due.
Payday loans are not suitable for people who want to repay their loans over a longer period as they are designed as short-term loans to deal with emergency and cash flow problems. The Annual Percentage Rate (APR), which is the rate you will be charged for borrowing can be over 1,000%. Even with the introduction of this ‘price cap’ that FCA introduced on daily interest rates, it can still be an expensive form of borrowing. If you fall behind with your repayments and ‘roll over’ the interest until the next pay cycle, the cost of borrowing even a small amount can escalate rapidly.
What the law says
- Lenders cannot charge you higher than 0.8 percent of the loan’s value per day, and you must pay no more than twice the total amount over the course of the loan.
- All payday lenders must be authorised by the FCA and you can check this on the FCA Register at https://register.fca.org.uk/
- All lenders must tell you what their APR is before you sign an agreement.
- A payday lender must check a consumer’s creditworthiness before they provide a loan, before they roll over a loan or increase the amount of credit. Payday lenders should also satisfy themselves that you can afford the repayments.
- You must get written information and a copy of the contract you have signed.