Payday loans and short-term loans

Payday loans and other short-term loans can be useful as a last resort in an emergency, however, they are extremely expensive and repeated use can lead to unmanageable debt. Wherever possible, this type of short-term lending should be avoided.
1

Take control of your money

If you took out a payday loan, chances are, you will have provided the lender with your card details to set up a continuous payment authority or recurring payment.

You have the right to cancel recurring payments directly with your bank, without having to get the lenders’ permission. See recurring payments.

If you do not cancel the recurring payment in time, you may find yourself without enough funds to cover your priority payments such as mortgage or rent, utility bills, council tax, etc.
You can cancel recurring payments over the phone or in branch. You must do this the day before the payment is due. Make a note of the date and time you cancelled the payment.

If the payday lender still takes money from your account after you have cancelled the recurring payment, you must complain to your bank and ask for an immediate refund.

Source: FCA – your right to cancel

2

Look at the conditions under which you were offered the loan

Payday lenders are well known for offering quick and easy loans without assessing whether the borrower would be able to repay the loan. This constitutes irresponsible lending. See unfair relationships.

Payday lenders often promote rollovers where the borrower pays a substantial amount in order to get more time to repay the loan.

Checklist

  • Were you given full details regarding the total cost of the loan and detailed terms and conditions BEFORE you applied for it?
  • Were you informed of the consequences of failing to pay it back in time and the amount of default charges to be applied?
  • Were you provided with a representative APR figure for the loan?
  • Did the payday lender assess your ability to pay back the loan? This involves credit checks to assess your credit history as well as your income.
  • Were you encouraged to roll over the loan rather than paying it back?
  • Did your payday lender provide you with information regarding recurring payments, including your right to cancel them?
  • Are you experiencing financial hardship or have you missed payments on priority debts such as rent or fuel due to payday lenders taking money from your account?
3

Complain to the payday lender

If the payday lender didn’t take the appropriate steps to ensure the loan is suitable for you and you were able to repay it, you can write a letter of complaint to the company. You need to do this before going to the FOS.

Dear Sir/Madam

Reference xxxxx

COMPLAINT

I wish to make a complaint in relation to the payday loan above. The product you sold me has resulted in me suffering serious financial hardship and becoming unfairly indebted. In particular , [INSERT DETAILS OF THE IMPACT THE PAYDAY LOAN IS HAVING ON YOU AND YOUR FAMILY, FOR EXAMPLE NOT BEING ABLE TO PAY YOUR RENT/MORTGAGE OR FUEL, NOT HAVING MONEY FOR FOOD, INCURRING CHARGES FROM YOUR BANK, ETC.] I would not have suffered such detriment had your company complied with the relevant consumer credit laws in relation to my individual circumstances. I believe: [INSERT PARAGRAPHS RELEVANT TO YOUR SITUATION SUCH AS:

  • The Representative APR and costs of the borrowing was not made clear to me on your website and advertising. This was unfair and contrary to the Advertising Regulations and the Consumer Protection from Unfair Trading Regulations; or
  • Your company failed to provide me with the statutory pre-contractual information before I entered into the loan – including a clear explanation of the consequences of missing a payment, default and rollover charge. Had I known this, I would not have taken out the payday loan and suffered financial hardship; or
  • Your company failed to assess my ability to repay when you first lent me money contrary to section 55B of the Consumer Credit Act 1974, resulting in additional interest and default charges;]

In view of the above, I would like to ask you to write off the interest and charges you have applied to my loan. If you are not prepared to do so please explain why, within the statutory 8 – week period, so I can take my complaint to the Financial Ombudsman Service. As this debt is in dispute, please stop all collection activity until this dispute is resolved.

Yours sincerely

If the payday lender does not respond in 8 weeks or does not offer a satisfactory resolution to your complaint, you can escalate your complaint to the Financial Ombudsman. See how to complain for reference.

Source: Govan

4

Set up an affordable repayment plan

Make an offer to repay the amount you borrow at a rate you can afford, in monthly installments. You may need to prepare an income and expenditure (budget) sheet. See budgeting for reference.

  • Avoid communicating over the phone, keep everything in writing.
  • Try to send emails rather than using on-site contact forms so as to keep a record of what you have sent.
  • Keep a copy of everything you send and receive. See dealing with debt.
5

Payday loan cap

The cap came into force in January 2015 and has the following effect.

Payday loan cap

  • Loans are now capped at 0.8% a day.
  • If borrowers do not repay their loans on time, default charges must not exceed £15.
  • The total cost including fees, charges, interest etc. is capped at 100% of the amount borrowed, which means no borrower will pay back more than twice what they borrowed.
  • The cap applies to repeat borrowing as well as to the initial loan.
The new rules are not retrospective, they only apply to loans taken out in 2015 or in future years.

The FCA published its proposals for a payday loan price cap in July. The price cap structure and levels remain unchanged following the consultation. These are:

  1. Initial cost cap of 0.8% per day – Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
  2. Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
  3. Total cost cap of 100% – Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.

From 2 January 2015, no borrower will ever pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

Source: FCA

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