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What happens if I can’t repay my payday loan?

Payday loans sound simple and straightforward – but if you can’t repay the loan on time, they can quickly become a nightmare.

A survey by Which? found half of people with payday loans were unable to repay their debts while a third were hassled by debt collectors in the last year. The Office of Fair Trading also says borrowers can pay ‘far more than expected through rollovers, additional interest and other charges’. In this guide we explain what happens when payday loans go wrong.

How payday loans are supposed to be repaid

With a payday loan, you agree to borrow a certain amount, over a fixed period of time – for example, £150 for 10 days. You don’t normally repay using a cheque or by ringing up with your bank details. Instead, the lender will automatically take the loan amount, plus interest, direct from your bank account on the agreed day of repayment. This is a process known as Continuous Payment Authority (CPA).

It’s your job to ensure there is enough money in your account to cover your repayment on the agreed date.

If there’s no money to pay the loan

Lenders will usually try to take the money from 5am on the day of collection. 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.

As soon as you have problems repaying your loan, talk to your payday lender and try to arrange a repayment plan with them.

If anyone has repaid loans for you in the past, such as friends or family, lenders will also try to take money from their account to settle your debt – again, this will happen as many times as necessary to get the money.

Interest and charges while the money is overdue

Most payday loan providers will immediately slap 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. This means a £100 debt would balloon to about £187 if you made no payments for two months.

However, different lenders have different approaches, and one of the biggest criticisms of payday lenders is the lack of transparency when it comes to late payment charges. It can be impossible to find detailed information on websites about late charges.

What’s clear, though, is that payday loans are one of the most expensive ways to borrow money, with annual percentage rates up to a staggering 6,000%, compared with a typical credit card APR of 20%. So the longer your payday loans drag on, the more your debts will zoom out of control.

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

Cancel payments

If you do have some money in your bank but need it for your priority bills such as your mortgage or rent, you can stop the payday lender taking money from your account. You need to contact your bank and asked for the Continuous Payment Authority to be cancelled (or the standing order or direct debit, if this is how you have chosen to pay). Under the Payment Services Regulations you have the right to withdraw your permission for a payment directly with your bank – you do not need to approach the company first.

If you have written a post-dated cheque to the payday lender to cash on the due date, contact your bank and ask them to cancel the cheque.

Always give your bank as much notice as possible – at least several days – otherwise they might not be able to cancel the payment for you.

Get help

As soon as you realise you cannot pay back a payday loan, you should contact a free and independent debt charity for advice. StepChange, the Citizens Advice Bureau or National Debtline can all offer advice on your rights when dealing with payday lenders and help to get your finances back on track, so you don’t have to rely on expensive credit anymore.

You will not be alone in getting help – charity National Debtline received 20,000 calls in 2012 for help with payday loans, a 94% increase on the year before and a 4,200% increase since the credit crunch started in 2007.

Talk to the lender

As soon as you have problems repaying your loan, talk to your payday lender and try to arrange a repayment plan with them.

It’s important to know your rights from the outset. Under the Office of Fair Trading’s Lending Guidance, all payday lenders must ‘treat borrowers fairly and with forbearance if they experience difficulties.’ The guidance also says creditors should give borrowers ‘reasonable’ time to repay their debts.

It’s also worth checking if your payday lender is a member of a trade body such as the Consumer Finance Association, the Finance and Leasing Association, the Consumer Credit Trade Association or the BCCA. Many of these bodies have a charter that provides more stringent rules for its members.

The main payday lenders have signed up to a customer charter which requires them to:

- deal with cases of financial difficulty sympathetically and positively;

- tell you how the loan works and the total cost of the loan before you apply; and

- freeze interest and charges if you make repayments under an agreed and reasonable repayment plan, or after a maximum of 60 days non-payment.

Debt collection

If you haven’t paid up or devised a repayment plan within a certain time – typically two months – the payday lender will pass your case onto a debt collection agency. This can be very stressful as you are likely to start receiving letters, phone calls and even home visits demanding the money.

If you reach this stage, you should sit down and work out how much you can afford to pay back and how often. Discuss this with your debt collector. You pay the collector and the collector will pass the money onto the payday lender. Read the OFT’s guidance on dealing with debt collectors for more information about your rights.

Complain

If you think you’re being treated unfairly by a payday lender, send them a written complaint outlining why you think they are not adhering to the OFT’s Lending Guidance. If you do not receive a satisfactory response within eight weeks, escalate your complaint to the free-to-use and independent Financial Ombudsman Service, who settles disputes between lenders and consumers.

Industry concerns

In March 2013 the OFT announced it had serious concerns about payday lenders after it uncovered evidence of widespread irresponsible lending. It said lenders were failing to explain adequately how payments will be collected, using aggressive debt collection practices and not treating borrowers in financial difficulty fairly.

It also found that up to half of payday lenders’ revenue comes from loans that last longer than 30 days and cost more than originally agreed because they are rolled over.

So far this year the OFT has revoked the licences of three payday lenders and says it will ‘continue to crack down on payday lenders that breach the law or OFT guidance’.

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