Fees & Costs

This page is all about the fees and costs around payday loans. As with most of our most important pages this one is split into three sections. The first section is designed to give you the fast facts about fees and costs of a payday loan. The second section is designed to give you a much more in depth understanding of the fees and costs around payday loans. Finally the third section is where we put all of our in depth articles on the topic. If you find our information helpful please feel free to share it on social media etc.

A Quick Overview

When you are about to borrow money from any source, you need to know:

  • The total you will need to pay back
  • How much interest will the lender add?
  • What are the charges and fees?
  • When you need to pay it back
  • How they will collect the money from you
  • What happens if you cannot pay back on time
  • Are there any penalties or fees for failing to pay correctly?

This should all be simple really, but in reality there are a wide range of 100+ payday lenders you could choose from (both online and high street shops) and they may all have different interest rates, fees and charge; so how do you begin to compare which is best for you?

What will a loan really cost you?

You probably want to know that if you borrow (for example);

  • £200 over 31 days (one month to payday)
  • It will cost you interest and charges of £52
  • Plus the original £200
  • So that’s £252 required to clear the debt.
  • If you then can’t pay on the 31st day and you need to “rollover” the loan for an additional 31 days this will cost an additional £52. So now the total you will need to pay will be £304.
  • The illustrative APR is 1940.5%
  • What if you wish to borrow a different amount?

This is just a simple example; the lender will confirm their interest rates, fees and charges direct to you. We have an A-Z of all Lenders that provides you with an instant guide to show what your loan will cost you with all interest, fees and charges.

A not so Quick Overview

The fees and costs can seem pretty simple and in essence as explained above they are. Often however we are asked lots of questions about the fees and costs of a payday loan that take just a little more explanation. We have grouped what we have found to be the most common topics asked around the fees and costs of payday loans into the below five categories.

  • How new regulation will impact the fees and costs of your loan
  • Understanding the fees and costs in a clear transparent way
  • Why people say they are so expensive
  • Why some lenders charge more
  • What cost implications are their if things go wrong

By the end of this page we would like to think you will have a much more comprehensive understanding of this industry and hopefully you will have a much better understanding as to why the fees and costs associated with a payday loan are what they are.

How new regulation will impact your loan

Recently a lot of changes have occurred in the payday loans sector. Specifically the main change that has occurred that is most relevant at this point in time relates to the Governments appointment of the Financial Conduct Authority to oversee all aspects of payday loans in the UK. It’s worth putting the changes that will affect consumers in the right context first.

In March 2013 Bristol University did a report (CHASM) that the government has used to help it highlight and guide future policy for the payday loans sector. The main findings highlighted several points that were fundamental issues the government was seeking to. [1]

  • The relatively high cost of credit
  • High default charges and poor practice among some payday lenders in applying these charges
  • The differences in ways in which lenders assess the affordability of credit for potential customers
  • Strong links between short term loans and revenues, and measures of financial difficulty
  • Repeated use of rollover loans by a significant minority of consumers.
  • Significant rates of multiple or repeat borrowing

Many of these aspects have been (partially) dealt with by the introduction of the Financial Conduct Authority and the changes in legislation and procedures adopted from July 2014, with more on the way by the beginning of 2015.

Under the new rules due to start in January, 2015, the default charges will be limited to £15, plus 0.8% a day in outstanding interest.

All legal lenders are committed to freezing interest and charges where you have been unable to repay any of your debt after 60 days. They will still pursue you for payment and report your failure to the credit reference agencies, which may damage your ability to borrow money from a bank or building society in years to come.

Where you are likely to be late in making a payment or you will miss it completely, you should contact your lender immediately so that you can negotiate the best deal possible and help keep any fees or charges at the lowest point.

Failure to keep the agreement made with your payday loan lender means that charges may be added to your account automatically.

Understanding the fees and costs in a clear way

One fair wish: You probably only have one wish – that the rates and fees are fair and clearly explained.

There is no doubt, that on first inspection, payday loans look expensive, with an APR that is very high and a collection of fees and costs that appear to benefit the lender more than the consumer.

However, while payday loan interest rates are higher than many other loan facilities (overdraft facility, credit card, secured bank loan), it is easier to look at the simple facts and see how they really compare, with results that you might find a little surprising.

Why people say they are so expensive

People love a good headline and people love things to be simple; Black or White, Good vs. Evil, Right or Wrong. The fact is the truth and reality is often much more blurred. Let’s face it payday loans are an easy headline and people love to see them as the bad guy, just as people like to see banks as the bad guys. Is this really the case?

Let’s take a closer look at this perception and try to cast a sceptical and critical eye over the issue and see what conclusions we reach.

As we see with the new FCA rules a lot of the more roguish elements of the payday loans sector are now likely to be eradicated, the full impact of the changes has still to take full effect on the industry. In many ways the new regulations have caused many payday lenders to tighten up the lending criteria so much that a large amount of available credit to consumers has dried up.

Two primary reasons exist as to why payday loans have a perception being expensive;

  • Rollover Fees : A rollover fee for those not familiar is the practice of allowing the customer to not pay the full loan off on the agreed date but to rather just pay another set of monthly fees to extend the payment of the loan out another month. The issues with rollovers now looks to have been addressed with the new FCA regulations limiting them to two.
  • APR: Before we deepen our analysts on why the perceived cost of a small value very short term loan from a payday lender is seen as so high let’s first compare a payday lender with an arranged or unarranged overdraft:
 

Amount borrowed

Over...

Total to pay

Payday lender

£100

28 days

£25

Overdraft: Halifax arranged

£100

28 days

£28

Overdraft: Halifax unarranged

£100

28 days

£140

As a quick side note: HSBC bank in the UK will charge you £25 for accidentally moving into an overdraft. Where you stay overdrawn for 21 days and attempt to make 12 payments, they will automatically charge you a fee of 150.

Figures from TalkTalk also suggest that;[2]

  • 14 million Britons have overdrafts, totalling £10.1 billion and
  • Banks receive 4.1 billion in interest and charges.
  • 35% of all adults in Britain rely on their overdraft.
  • Banks make £3 billion a year from unauthorised overdraft charges.
  • 2 million workers are overdrawn on payday

Clearly, it is not easy to compare an APR rate over 28 or 31 days with another loan over three or five years. In reality, it is perhaps better to compare how much you will physically repay to give you a clear example of how the loan will be repaid from your salary or other source of income.

Let’s look at how the facts stack up against a more conventional loan as without understanding how the APR is calculated, the payday loan APRs do look incredibly high, but when you compare the amount of money you will actually pay for the loan over a longer period with that of an overdraft or credit card, the rates become more similar.

Loan Amount

APR

Term

Fees

Total to pay back

interest will equal x% of the amount borrowed

Loan A £400

2,096%

31 days

£120

£520

30%

Loan B £400

1,420%

31 days

£104

£504

26%

Loan C £400

939%

31 days

£88

£488

22%

Loan D £400

20%

3 years

£125

£525

31%

Loan E £400

20%

5 years

£210

£610

52%

You are not comparing apples with apples or oranges with oranges when you compare the APR of a short-term loan to that of a long-term loan. Where you are able to source a payday loan from a variety of lenders, then you will have the opportunity to compare the APR between the offers given to you so you can select the deal that is best for you.

What is APR?

APR is the acronym for annual percentage rate. You might also want to check out our post The Argument of APR.This means that it includes interest plus any other additional fees or charges that you need to pay back the loan and is then calculated over a 12 month period. This makes it relatively easy to compare credit card rates and bank secured loans because you are probably going to borrow the money for a period of at least one year and they become a realistic comparison point. When you look at the APR of a payday loan, it looks incredibly high, because the interest rate that will last between 14 and 30 days must be calculated and compared over a full year.

There has been a substantial focus on the illustrated APR rates of many payday loan lenders because the rates look considerably higher than those offered through standard overdraft facilities by the high street banks and credit card companies.

The law in the UK requires that the illustrated APR is displayed prominently, as is required by UK Advertising Standards.

Having said that and as we mentioned above without understanding how the APR is calculated, the payday loan APRs do look incredibly high, but when you compare the APR of the loan over a longer period with that of an overdraft or credit card, the rates become more similar.

Nevertheless, as the idea of a payday loan is to clear the debt within a month, until APR rules change, the figures will continue to look high compared to those advertised by high street lenders.

The Credit Consumer Act 2006[3] updates the original 1974 Act, which insists that the consumer always knows the APR before they enter an agreement for a loan.

Of the many different ways in which you could apply to borrow money, a payday lender may be able to transfer the funds to your bank account in a matter of minutes, if not a few hours or at the very worst, the following day. When you compare that to the time taken to apply and receive a bank loan or overdraft facility (not forgetting collecting and collating the paperwork to declare to the bank), consumers are often pleased that a payday loan can offer the funds so quickly and efficiently, especially if an emergency has to be dealt with, financially.

Where these figures are clear and unambiguous, it is easy for a potential applicant to understand if they are able to clear the debt within the required target period of one month or less, or to judge whether they will require the need to extend or roll over the debt into a second month. Either way it’s becoming clear that with the new FCA regulations a payday loan is becoming not as expensive a form of credit as some make it out to be.

Why some lenders charge more

There are many good reasons why payday loans have interest rates that are higher than mortgage rates or standard loan rates from your local bank or building society.

  • People with poor credit rating can apply and receive a payday loan. This is a larger risk to a lender, when compared to a person with a good credit rating.
  • There is more likelihood of the debts defaulting because some people applying for a payday loan cannot source loans from elsewhere because their income and ability to repay debts might be more difficult compared to people who have a higher income and always repay their debts.
  • More time and maintenance goes into the effort of looking after payday loans. The majority of loans complete within 31 days, so the cycle of opening and closing an account occurs more regularly than if you apply for a five-year loan. This increases the costs to the payday loan lender.
  • Someone will need to be employed to manage your account, which will require more attention over a short period, compared to a mortgage loan, for example.
  • A higher percentage of people will have to be reminded that they should clear their debts completely.
  • While lenders will offer their collection practices to include email, text messages and telephone, they may need to resort to legal action to ensure the debt is repaid
  • The lender may charge a transmission fee to send the funds from their bank account to your account.

In this example, a lender is charging £15 as their interest charge for one week. Where the debt is carried over for a longer period, this chart shows how the figures are reflected in much higher repayments. Now compare the APRs!

Amount borrowed

Over...

Total to pay (no fees)

Expressed as a representative APR

£100

28 days

£25

1737%

£100

15 days

£19.50

4214%

As you can see from the above example, with a loan of only for a few hundred pounds there isn’t much opportunity for a lender to make a good profit. The only way the lender can make a sensible profit from such a small loan is to charge high interest rates, especially when compared to borrowing tens of thousands of pounds for a vehicle, over, say, five years.

Business is all about making money for the shareholders. Lenders are not in business for a community benefit. They offer a fair service and a fair price provided the borrower is able to borrow responsibly.

Competition in a market place should drive prices down, but even where there are over 250 different credit cards available in the UK, many charge different interest rates or offer different deals to encourage you to join them. This is the same with payday loan lenders, who are offering different interest rates, different repayment periods and other distinguishing information, from which you have to make your own choices.

Some lenders will take a more understanding view with lenders to people who are the highest risk against failing to meet the repayments correctly. For this benefit, they will need to charge more because more people will default on the loans.

There are lenders who are just plain greedy and charge whatever they believe they can get away with. They will rely on consumers not checking and comparing deals that are available and accepting the deal at face value. Sometimes, when an emergency falls on your family, you have to make a decision to act quickly to source the funds to deal with the problem and many in these circumstances will not compare deals or take financial advice to source the best deal. We are seeing that the new FCA regulations are removing a lot of the lenders that had more predatory business models.

What cost implications are their if things go wrong

If things are going wrong we recommend you read our section on lender issues.

You may have to pay a late charge/fee if you miss a payment completely. Lenders vary their charge between £1 and £100. The new FCA regulations are limiting this to £15, this mandate will take effect in January 2015

A Which? report said that many payday lenders were charging default fees of £20, 4 of the top 17 lenders charged £25 and Wonga charged £30. Moneyshop.tv charged £29 while Quickquid.co.uk charged £12.[4]

All lenders will detail their default fees in advance with Wonga insisting that the £30 for late payment “reflects the additional costs incurred.”[5] 

Refrences

[1] gov.uk/government/organisations/department-for-business-innovation-skills
[2] talktalk.co.uk/money/features/bank-account-overdrafts.html
[3] oft.gov.uk/advice_and_resources/resource_base/legal/cca/CCA2006
[4] press.which.co.uk/whichstatements/which-response-to-financial-conduct-authority-payday-lenders-debt-collection-review
[5] telegraph.co.uk/finance/newsbysector/banksandfinance/10567015/Payday-lenders-charging-unlawful-default-fees.html

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