6 things you should know about payday loans before applying

Perhaps you’re feeling the squeeze and you’re considering getting a payday loan. You may even be wondering if you can get a payday loan with bad credit. Before making any decisions, you should be aware of the facts. Read on to find out six key things you need to know about payday loans before you apply.

If you’re considering a payday loan, you’re certainly not alone. The most recent figures from the FCA (Financial Conduct Authority) show that some 5.4 million people take one out each year. 

Payday loans are used for all sorts of things, from paying bills to buying school uniforms. Payday loan websites make it seem like these are an easy way to borrow money – and fast. But are they all that they seem?

1. Do payday loans damage your credit score?

When it comes to your credit score, you don’t have just one. Different credit reference agencies and lenders assess your credit score differently. This means that having a payday loan on your record will be seen slightly differently depending on the credit reference agency or lender. 

In general, most credit reference agencies and lenders usually see a payday loan on someone’s file as a sign that the person is in financial stress. They may perceive that the risk of missed or late payments is high. For this reason, a payday loan may have a negative impact on your credit rating. 

2. How long does a payday loan stay on your credit file?

Many people are worried about the impact of a payday loan on their credit score. More specifically, they want to know whether payday loans damage your credit score.  

One of the key things to consider is what long-term impact a payday loan has on your credit file. Payday loans usually show on your credit report for six years.

This is based on making repayments in full, and on time. If you’re late with a payment or fail to repay altogether, then this type of loan could appear on your credit file for longer than six years. 

3. What’s the maximum interest a lender can charge?

When looking at how much a payday loan costs, it’s important to look at the interest rate the lender charges. But there’s other financial considerations too. 

Arrangement fees, early repayment fees, missed and late payment fees can soon add up. Let’s take a look at these and see how much they could be:

Payday loan interest 

Changes to legislation in 2015 mean that a cap was put on the amount of interest charged by payday loan lenders. The new laws mean that interest and charges can’t exceed more than 0.8% per day.

According to the MoneyHelper website, someone taking out a loan for 30 days will pay no more than £24 in fees and charges per £100 borrowed. 

Late payment/default fees

One of the most important things to know about payday loans is what happens if you’re late paying your loan repayment instalment. If you don’t repay on time, the most you can be charged in default fees is £15 plus interest on the amount you borrowed.

Total costs 

The biggest consideration when it comes to payday loans is the risk of falling into a spiral of debt. While legislation hasn’t eradicated this, it has tried to reduce the impact.

You can now never be asked to pay back more than double the amount you borrow. As an example, if you borrowed £100, even with late payment fees on top of the interest, the most that you’d repay is £200. 

4. Can you get a payday loan with bad credit?

If you’ve borrowed money before and have struggled to repay it, you may be wondering if you can get a payday loan with bad credit. The answer is that some payday loan lenders state that it is possible to get a loan with bad credit. 

However, the real question to consider is whether a payday loan is the right solution for you. If you’re already experiencing financial difficulties, and these have impacted your credit file, then consider that a payday loan may not be the answer. 

Payday loan lenders target financially vulnerable people. The phrasing of adverts leaves people believing that no matter what their financial circumstances, a payday loan can help. But is this really true?

Borrowers can sometimes become trapped in debt and find themselves repeating the payday loan process. Many borrowers later realise that the company that gave them the payday loan didn’t lend to them in a responsible way. 

This can lead to complaints around the fact that the loan was never affordable in the first place.

5. Can a lender take repayments from my bank account?

One of the other things to know about payday loans is how you repay them. Generally, lenders base repayment schedules on repaying what you’ve borrowed plus interest within a month. 

It’s common to make these repayments via a debit card. When you take out a loan, you may be giving the lender permission to take money from your account in this way. 

This is called a continuous payment authority (CPA). It works like this:

• The lender may take from your account what is owed on the day that it’s due. 
• If you don’t have the funds available, the lender may use this authority to request the money from your bank again. 
• The lender shouldn’t use the CPA more than twice and shouldn’t use it to take part payments. 
• You can cancel the CPA at any time by contacting your bank.
• CPAs are also used when making purchases using buy now pay later

6. Can I get a payday loan without a credit check?

When considering getting a payday loan with bad credit, some people look for loans where there are no credit checks at all. They think that this is a good way around the fact that they have bad credit.

But there’s more to it than that. Lenders use credit checks to assess your ability to repay your loan. Basically it means they use this information to ensure they don’t lend you more than you can afford to pay back. 

The credit checks show details of other borrowing and how you’ve handled your repayments in the past. For example, how many credit cards you have and whether you have made payments on time.

This information helps the lenders make a decision about whether to approve the loan and if so, how much interest to charge. So when a payday loan company says that there are no credit checks, alarms bells should ring.

Here’s why lenders must do a credit check:

1. It’s irresponsible to lend without doing a credit check to see whether the borrower can afford the repayments. It means that they may end up lending you money that you have little to no chance of repaying. This could harm your financial future.  

2. Not carrying out a credit check breaks FCA rules. Any regulated loan company must carry out a credit check before approving a loan. If you’ve found a company that doesn’t do this, it begs the question, are they legitimate? 

On-demand pay is a safer and cheaper alternative to payday loans

Having read the six key things you need to know about payday loans, you’re probably wondering what other alternatives are available. 

On-demand pay, also known as earned wage access (EWA) is on the rise, and for good reason. It’s an employee benefit offered through your company. It allows you to access your pay as soon as you’ve earned it. 

No more waiting for payday. Simply transfer what you need directly to your bank account. 

On-demand pay is great for financial emergencies like an unexpected bill. Plus there’s no interest to pay, as on-demand pay isn’t a loan. 

Interested? Find out more about Openwage. 

The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.