Explain how payday loans work
The way a payday loan works can vary depending on the lender you decide to use. Some companies allow you to choose when the money will be repaid, whilst most others will base it on when you will receive your salary. However, it is vital that you understand how payday loans work if you are going to take one out.
Normally when you receive a loan, the money will be automatically transferred to your bank account within 24 hours of your application being approved.
Before you receive any money, the lender you choose must make sure that you are able to cover the costs. This means they must ensure that you have enough income for that month to be able to pay them back.
Once this has been established, they should explain:
- How much you must pay back
- What happens if you fail to pay it back on time
- Extra payments caused by failing to pay it back on time
- The unsuitability of the loan for long-term borrowing
- Explain the workings of a Continuous Payment Authority (CPA)
- Explain how CPAs can be cancelled
When you pay back a loan, the amount borrowed will be taken from your account by the lender, plus interest. If you were to borrow £100 for 30 days, and pay it back on time, you should be charged no more than £124.
How are repayments made?
Repayments are very important to know about when you are trying to find out how payday loans work. They are normally carried out using a Continuous Payment Authority (CPA), a method which allows the lender to withdraw money from your account. Not all lenders have informed their customers how much money they will withdraw, and when, before taking it. CPAs can be quick ways to pay money that is owed, but many people have been unhappy with the process. It is important that you have enough money in your account to cover all essential bills before repaying the loan, because otherwise you could be overdrawn and owe your bank money.
Lenders are now limited to two failed CPA attempts to retrieve the money from your account. This can be caused by insufficient funds being in your account at the time they attempt to retrieve the money. However, this limit resets if you refinance or have a loan roll over and pay the money owed.
To stop the payment (due to being unable to afford it) you should tell your bank/card provider to prevent the payment from being taken by the lender, at least 24 hours before its due date.
For difficulties in repaying a loan, lenders may offer you a longer period to pay it back. They can either allow you more time, or roll the loan over. Normally, when a loan is rolled over, you pay a fee to receive more time to pay back the loan. As of July 2014, loans can only be rolled over twice before the payment needs to be made. This helps prevent debt developing further.