The concept of a payday loan is, on the surface, straightforward. Should you be experiencing any financial shortfall, you fill out a short form, get a quick loan (if you are accepted), and then pay it back in good time so that you do not accrue any significant level of interest.
It is worth highlight at the very top of this page that payday loans should only ever be taken out by those who are very aware of both how and when the money will be repaid. Such loans can be incredibly valuable and useful. They can help people bridge a temporary financial gap, but they should by no means be considered ‘free money’, and they certainly not be taken out frequently. Debts can quickly build if payment dates are missed and could result in hefty sums being owed.
Of course – as many millions of people have discovered throughout the coronavirus crisis – one’s financial situation can go south incredibly quickly. In recent months, with redundancies and furloughs becoming commonplace, many people have turned to payday loans to provide them with a quick cash injection.
But what happens if it turns out that the money owed cannot be repaid? What steps can be taken, and what are the potential consequences of being unable to find the necessary money?
We’re here to give you all the information you need.
What Is Supposed to Happen?
Firstly, let’s look at what is supposed to happen when someone takes out a payday loan. Generally, the system in place requires the borrower to fill out a form – complete with a certain amount of personal information for security reasons – and then commit to paying back the money by an agreed date. Usually, this will be a fixed period of 10, 20 or 30 days.
The most common repayment system is for the lender to take the money directly from the borrower’s account once the allotted date arrives. This is a process widely referred to as Continuous Payment Authority (CPA). There is – generally speaking – no need for a cheque to be sent or a payment to be physically sent.
Quite simply, the role of the borrower is to ensure there is enough money in the agreed account on the specified day. Once the loan account has been settled and the amount owed has been repaid in full, the contract will be fulfilled, and there will be no problems or issues.
Payday Loans in the Age of Coronavirus
A study published in April 2020 found that the coronavirus crisis has encouraged more people to make use of the services offered by payday loan providers. This is hardly surprising because around one-third of UK adults (28 per cent) have had their income crippled somewhat due to the coronavirus pandemic. A similar number of people – 26 per cent of UK adults – admit that they have had to resort to borrowing money, with the average sum being £1,719.
Of all those that have borrowed money, more than half – 51 per cent – say they have been compelled to turn to payday loans, largely since significant sums of money can be accessed very quickly. However, the same study also unearthed that almost nine out of 10 people (86 per cent) who have already taken out such a loan believe they will do so again soon.
And, while these loans are an entirely valid form of borrowing for those who know they will be able to pay them back, there will undoubtedly be people who will struggle to obtain the funds required to stay in the black.
So, what situations are these people liable to face?
If the Money Isn’t in Your Account on the Set Date
This will nearly always be the first stage in the process should you find yourself unable to repay the set amount. There is no designated time of day when lenders will try to take the money from your bank account – some will do it immediately midnight passes, some will do it early in the morning (around 5 am), while others might wait until midday – so if you have the money available to repay the loan, make sure it is in your account the day prior.
If you know in advance that you will not be able to pay back the money you owe, then it is certainly worth getting in touch with the lender as soon as possible to explain the situation. It may be that the terms of the contract can be altered slightly, but it should be noted that there is no guarantee this will happen.
It is also certainly worth highlighting that if you have had previous instances where you have not been able to pay the money back, and someone – a friend, colleague or relative – has repaid the outstanding debt on your behalf, then the lender may well chase them for the outstanding money. But, again, this is because the lender, quite simply, wants the money owed.
When Your Payment Is Overdue
If you reach the stage where you have not paid the loan back by the set time, you are liable to find yourself facing several consequences. It is likely that, in the first instance, you will be hit with a late payment fee. This amount will differ from lender to lender but tends to be relatively small (somewhere in the region of £30).
However, while this late payment fee is another financial burden, it is by no means the most significant one you will accrue. The most financially detrimental consequence is that your loan will have interest added to it, and this is likely to be added every day that the amount remains unpaid. This means that a repayment amount can very easily double if it remains unpaid for around two months, which is obviously likely to make what was already a troublesome financial situation far worse.
The long and short of this is that the longer you spend without the capacity to pay back the initial loan, the more your debt will grow, and the more difficult you will find it to get back on a stable financial footing.
Cancelling the Associated Direct Debit
If you are in dire straits financially, you will likely need to start prioritising your payments. However, the lender will ultimately need to be paid what is owed. It is more essential for you to pay rent, buy food and keep the electricity on. Should it come to the point where you need to focus entirely on bills and cannot pay anything back to the lender, you could get in touch with your bank or building society and ask for the cancellation of the associated CPA.
This sounds, on the surface, as though this would be a somewhat unlawful thing to do, but that is by no means the case; the UK’s Payment Service Regulations, which were put in place in 2017, have you covered. Under these rules, you are entirely within your rights to stop any payment with your bank without having to get in touch with the organisation that would be the payment’s recipient. This can be done with direct debits and cheques (as long as they have yet to clear). The key thing to remember when doing this is that you must give your bank or building society as much time as possible so that the cancellation can be implemented.
Get Assistance From Expert Advisers
Once you have cancelled any direct debit and can be assured that money will not be taken out of your account that you are not anticipating, you need to seek advice and guidance and begin the process of understanding how you can get the loan repaid in the most efficient way possible.
Several organisations offer free advice – StepChange or National Debtline, for example – and these will be able to give you a detailed analysis of what you are likely to experience and how you can go about getting yourself on firm financial footing. It is also worth speaking to Citizens Advice and detailing the situation you find yourself in.
Not only will contacting such expert advisers give you a far better understanding of what you can do to repay your payday loan in a timely and efficient manner, but it will also be possible to obtain guidance to ensure that such problems do not arise again in the future.
Speak to Your Lender and Make Them Aware of the Situation
At some point, you will absolutely need to ensure that the lender is aware of your financial difficulties. Then, you will have to agree to a repayment plan with the lender, and the sooner you contact them and the more honest you are, the more likely it is that you will be able to come up with a solution that benefits both parties.
You need to be aware that, in such a situation, you have particular rights; it is not certain that you will have to bring these up to the lender as they are unlikely to do anything detrimental to you just for the sake of it, but knowing them will never be anything other than a boon for you. The Office of Fair Trading’s Lending Guidance requires all lenders to treat customers ‘fairly’ if they experience any financial difficulties and must give every borrower a ‘reasonable’ period of time to pay off the debt.
This may sound like a somewhat vague legal declaration – and one that is potentially open to interpretation – but no lender will want to be taken to court (and potentially end up not getting any of the loan back) because they have not abided by the law.
Many payday loan lenders are also signed up with at least one trade body, and it is worth checking to see if this is the case because these bodies tend to have a set of rules and regulations that their members must agree to. These tend to be around treating consumers with respect, fully explaining the terms and conditions around any loan and what could happen should it not be repaid in full at the agreed time, and for how long interest will be added to the debt.
What Happens If You Don’t Do These Steps?
We strongly recommend that you commit to the steps listed above to ensure that there are no long-term problems associated with the outstanding money, but if it comes to the point where you are unable to, you need to be aware of your options.
The most likely consequence is that you will have your case passed on to a debt collector. As the name suggests, the main role of such a company is to find a way of ensuring that any outstanding debt is paid, and this will likely see you being hit with telephone calls, emails, letters, and potentially even house visits. This can, of course, be an incredibly stressful situation to be in.
If you get to this stage and you want to seek advice to see what your options are, it might be worth getting in touch with the bodies listed in the ‘Get assistance…’ section and then seeing what your options are and how you can start to eradicate the debt you owe. It is also worth getting in direct contact with the debt collectors to let them know what your payment plan is, when they can expect money to be sent over, and also explain what advice you have been given.
Do You Feel You’ve Been Treated Unfairly?
If you do not feel that you are being treated well throughout the repayment process, then there are certainly steps you can take. If you do not feel that the lender is abiding by the required industry regulations, then you should write a letter explaining what you believe the issue(s) to be and how you would like it/them to be resolved. The lender should respond relatively quickly, but if they do not do so within two months, you can intensify the situation by getting in touch with the Financial Ombudsman Service. This body will then be able to take a detailed look at the scenario and come up with a solution that is both fair and legally binding. There is no guarantee, however, that it will be in your favour.
Have a question that hasn’t been answered here? Then, get in touch with us today, and we’ll be happy to help!