5 things to watch out for before you get a small payday loan

Managing Money

Payday loans are a common solutions for many in times of trouble. When their pay hasn’t quite stretched to the end of the month or they’ve had an emergency such as a car breakdown, small payday loans are often the last resort to get by. With savings drained and no access to other credit, small instant loans are, at times, the only choice.

If you’ve found yourself in a position where there seems to be no alternative, here are 5 things that you need to know before you take the plunge.

High-interest rates

Small payday loan companies prefer to show their interest on a daily basis rather than referring to the APR (Annual Percentage Rate). With daily rates being shown as low as 0.8%, this masks APRs that can often be as high as 1,500%. This means that you would end up paying £232 for a £200 loan for 20 days. To get a grasp on interest rates use this calculator with StepChange.

How your repayments will be collected

Often small payday loan companies will see your payment being collected by a Continuous Payment Authority (CPA). This means that your payment will be taken directly from your debit card when it is due. This saves you having to remember to make a payment, but you need to make sure that you still have sufficient funds to cover other expenses.

If your payment fails, the CPA allows the lender to keep trying your card. As soon as funds enter your account, you could see them being quickly taken. There can also bee a late fee which applies to your account.

Make sure that you are aware of all of the fees

Before taking out a small instant loan, be sure that you are aware of all of the associated fees. You are likely to find the following:

  • Arrangement fees
  • Early settlement fees
  • Late payment fees

These will all add to the already expensive interest rates. Even by trying to pay off your loan early and save on the interest, you are likely to be hit with fees meaning that you don’t save as much as you’d hoped. 

The consequences of missing a payment

If you happen to miss a repayment to a small payday loan company, the consequences are likely to be dire. Your missed payment will be reported to credit reference agencies which will see your credit score fall. This makes it even harder to obtain mainstream credit in the future. You can also expect:

  • To be charged late fees - a maximum of £15 plus interest
  • To have to deal with debt collectors 
  • The possibility of CCJs 
  • A damaged credit file

This highlights the importance of knowing exactly what you are taking on and ensuring that you have budgeted for the repayments.

The long term impact of short term loans

Small instant loans are rarely one time only. Here’s the reason why:

  • You turn to a small payday loan as you run out of funds before payday
  • You borrow £100 to be repaid the following payday
  • The repayment day comes and you repay the £100
  • You now also face paying £24 in interest 
  • Last month started with a £100 deficit 
  • This month you are already £124 down
  • The only answer is another payday loan 

That is how the never-ending cycle of debt begins.

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