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If you’re struggling financially, a short-term payday loan can seem like an attractive proposition but if you can’t repay the loan on time, it can quickly become a nightmare.

The high-cost short-term credit can charge interest of up to 292% per year and recent research revealed that regular applicants for the loans include NHS staff, council officials and gig economy workers.

Payday loans have also been identified as the “unhealthiest” form of credit, while a recent survey by Which? found that half of those with payday loans were unable to repay their debts.

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What is a payday loan?

A payday loan is a type of cash loan, normally paid directly into your bank account.

A payday loan is so-called because it is designed to be a short term loan to cover you until you next receive your wages or benefits.

With a payday loan, you agree to borrow a certain amount, over a fixed period of time – for example, £200 for 10 days.

Usually, the lender will automatically take the loan amount (with interest) directly from your bank account on an agreed repayment date. This process is known as Continuous Payment Authority (CPA).

You are responsible for ensuring that there is enough money in your account to cover the repayments.

However, even though these loans are non-priority, the interest rates are usually very high and it can be easy for the debt to spiral out of control.

Payday lenders’ price cap rules

In 2015, new rules were introduced by the Financial Conduct Authority (FCA) about how much payday lenders can charge.

• Interest and fees must not exceed 0.8% per day of the amount borrowed, even when rolled over.
• Default charges must not exceed £15 and interest rates on unpaid balances must not go over the interest rates of the initial amount borrowed.
• Borrowers should never have to pay back more in fees and interest than the original amount borrowed.

What to if you cannot pay your payday loan

If you do not have enough money to cover your next loan repayment, there are several options you can consider.

1. Rearrange repayment plan

Usually, payday loan lenders will attempt to take the money from your account from 5am on the repayment day.

If there’s no money in the account, or not enough to cover the whole debt, they will keep trying to collect payments for as long as it takes to recover the entire amount.

Unfortunately, if anyone has repaid loans for you in the past, such as friends or family, it is likely that lenders will also try to make money from their account to settle your debt.

It’s a good idea then to contact your payday loan lender as soon you have problems repaying the loan, to try and arrange a different repayment plan with them.

2. Loan rollover

Some payday loan companies may offer you a loan ‘rollover’.

This means your loan is rolled over to the next month and will give you extra time to pay.

While this may seem like a good option if you are struggling to pay, it has the potential to cause more problems if you don’t properly consider all your options.

A rollover usually means you make a new agreement with the payday loan company, which usually results in more interest and charges being added, so you’ll owe more than you did before.

Only consider a rollover if your repayment difficulties are temporary and you are confident you will be able to clear the loan in full the following month.

3. Stop your payments

If your loan repayment due date is approaching, and you cannot afford to pay the agreed amount, you can take action to stop your payment from being taken.

If you need to cancel a direct debit, standing order or payment by cheque, ensure you contact the bank immediately and give them enough time to process the cancellation before the planned repayment date.

You also have the right to cancel a CPA completely.

The FCA states: “In most cases, you should be able to cancel by contacting the company taking the payment and asking it to stop. However, you do have the right to cancel directly with your card issuer. Once you have done this, it must stop payments immediately – it cannot insist that you agree on this with the company taking the payment first.”

To stop your continuous payment authority write to/email either the payday loan provider or your bank.

If you withdraw your CPA and the money is still taken from your account, this is an ‘unauthorised transaction’ and your card issuer should give you a refund.

You should be aware, however, that cancelling the CPA does not mean you no longer owe the money and you will still have to deal with the debt in another way in the long term.

4. Get help

As soon as you realise you cannot pay back a payday loan, you should contact a free and independent debt charity for professional advice, such as StepChange or the Money Advice Service.

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What happens if payday loan repayments are overdue?

If you cannot make a repayment and do not take one of the above options, most payday loan providers will immediately hit you with a late payment fee of around £12 to £20 if they cannot collect payment on its due date.

The loan will also continue to attract interest, often at about 1% a day. So on a £200 loan, for instance, with a late payment fee and interest, that could rise to over £280 within one month.

If you haven’t paid the agreed amount or set up a revised repayment plan in a set period of time – usually within two months – the payday lender will pass your case onto a debt collection agency. This is only likely to add to your stress as you will start being hassled by letters, phone calls and may even receive home visits from collectors demanding the money.

You should also be aware that failing to repay a payday loan will damage your credit file, making it harder to get credit in the future.

If you have debts of over £5,000, and you're struggling to repay them, get in touch today!

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