A not so Quick Overview
When responsible people say “Give me the facts so I can make up my own mind,” we agree completely – and here are the facts presented in an unbiased manner for you to read, understand and prepare your own decision making process.
Please remember that facts change and we will update our website as new evidence and information is available, but, occasionally, some facts might become slightly out of date, but this should not affect your overall decision making process. For example, we won’t know the data for 2104 until the year has finished and therefore the data from the third quarter of 2014 may differ from any facts presented that are dated late 2013. We constantly strive to ensure that our facts are up to date, but facts sometimes vary from one reliable source to another...
You may already know a little about payday loans, you may know nothing. The truthful facts here are designed to help you understand what responsible lending is all about and how you can make your decisions based on the simple facts and we go into detail where we can help you further.
The true facts about taking out a payday loan
There are many myths and legends about payday loans which is why it is difficult for the consumer to negotiate the minefields that distinguish the high quality businesses and ethics from many lenders, compared to others which give this essential industry, such a bad reputation. This travels mostly from those who do not know or understand what really happens why and when people require a small urgent and cash advance, to be cleared by the next pay day. This article aims to provide you with the true facts about taking out a payday loan so that you are able to determine the truth relevant to your specific needs and push the myths and legends towards forgotten history.
Why the need for payday loans exists
Anyone can be caught with the need to gain access to a supply of available funds to help deal with an event that is unexpected and does not form part of your usual weekly or monthly budgeting from your income.
- Your car breaks down and you need a part to keep it on the road
- A student’s laptop fails to boot and needs replacing
- A medical emergency, not covered by the NHS and you are without adequate insurance cover
- Your child requires funds for a school event
- You don’t have sufficient funds to get you to your next payday
- You need money instantly in your bank account for any good reason
Unexpected events are quite simply an experience where you require access to funds that you haven’t planned for. Unfortunately, the money required to solve these issues is often required within a few hours, and does not allow you the time to organise an overdraft with your bank, even if you qualified for a loan.
What a payday loan is
A pay day loan is a relatively small amount of money (£100 to £1,000) borrowed over a short-term (15 to 90 days). Sometimes a payday loan is also referred to as a cash advance, wage day advance, term loan or 3 month loan. In essence they are all terms classed as High Cost Short Term Credit (HCSTC) and in essence all offer more or less the same type of service. That of an easily accessible and fast line of credit that costs more than a traditional line of credit due to its shorter loan term.
They are all an unsecured loan, meaning that a consumer doesn’t need to put up anything as security to be held against the loan before the money is paid out. This is true whether it is linked to the borrower’s pay or not. Effectively, a payday loan is a cash advance against an amount you can afford to pay back from your next pay day wage packet.
The loans offered are agreed by lenders who are sure that the individual has access to a regular income and will be able to repay the debt on time.
Payday loans should not be confused with other cash advances such as bank overdrafts, credit card cash advances and any other prearranged forms of credit, which are all targeted to be repaid over much longer period of weeks, months or years. Payday loans are governed by legislation ruled by UK law, and in almost all cases the lender will not request a credit check or security which is why the money can usually be transferred over to the applicant’s bank account in just a few minutes or a few short hours at the most.
The majority of lenders use similar application requirements. You will need to provide;
- Proof of your income from an employed job, or from another source regular source (not benefits)
- Valid identification
- Proof of being aged 18 or over
- An active bank or building society account/debit card
…And what a payday loan is not
Where you are seriously struggling with significant debt problems, taking out a payday loan is not your best answer to solving your financial woes. As payday loans are targeted to be for short-term use only, they will not help you clear major debts because the amount you can borrow will be too small and you will only be clearing a smaller part of your balance by increasing your debts, leaving most of it still outstanding.
As a credit check is not usually required, you will not need to spend hours in a bank, completing an application form, presenting masses of paperwork and then waiting to see if you are accepted for the loan, often not on the terms you applied for.
This is not the same as getting an illegal cash advance from a loan shark.
Individuals will not always be able to get easy money where they can’t afford to pay back the loan amount and any fees or charges, plus interest, from their next pay cheque.
How the industry works:
Some confusion has arisen in recent years over exactly how the payday loans sector truly operates. In this section and in subsequent articles we reference in this section we hope to shed light on the structure of the industry.
In essence the payday loans sector is made up of three core sectors. You have the lenders, the brokers and then the networks. We ourselves are technically a broker (although most likely the most honest and transparent in the sector). Brokers tend to allow users to directly connect with a lot of lenders all in one go. Networks on the other hand work with both the broker and lenders to facilitate the transaction of the data and keep the users data safe. We then have the lenders who directly issue the loan.
The best way to explain the payday loans sector is to perhaps use the analogy of the car insurance market. Using this analogy I am sure you will have found that visiting an aggregation site like moneysupermarket.com (a broker) is often a lot more time saving than applying to each individual insurance company directly. Well in essence the payday loans sectors use of similar systems is designed to achieve the same goal. Where the payday loans sector differs from that of insurance is how the offers are presented to the applicant. Whereas with insurance the applicant pays the insurer before a business relationship commences, with payday loans it is the lender that pays the applicant first before the relationship commences.
Due to this increased risk that the lenders take then fundamentally a different approach is needed so as to control the risk of customers taking the money and never paying any of it back. As such the payday loans sector works in reverse to say the insurance sector. So rather than your information getting sent to lots of lenders all at the same time and then they all come back with an offer the payday loans sector instead shows the customer information to a list of lenders that form a line to see the applicants data. The applicant’s data generally starts at the top of the list with the lender that has the most conservative appetite to risk, this then works its way all the way down to the last in the list. By the time the application has reached the bottom of the list most of the lenders have looked at the application and deemed it a credit risk, as such if an offer is made it is usually on more expensive terms so as to compensate the lender for what will likely be a high risk of default on the loan.
So to recap the business types have different advantages and disadvantages.
- Lenders - They provide the loan money
- Brokers - They work like a money supermarket and allow a consumer to apply for a loan across a range of lenders, with the broker choosing the most suitable in terms of likelihood of the loan being granted and preferred rates
- Networks - They work at matching lenders with brokers.
What a lender can and can’t do
Although not a comprehensive article on all the can and cant’s the below should help point you in the right direction on a lender is able to do and what your rights are.
- A lender can assess your income against proven evidence. They cannot lend you more than their guidelines suggest.
- They can lend to you if you are over 18, but not below.
- A lender will have a system in place for those who are unable to clear the debt on time. They cannot make up their rules as they go along.
- A lender will have set fees and charges. They cannot ‘invent’ new fees as they feel fit.
- A lender has published interest rates, but the rates may vary according to the risk they perceive, in having the debt paid properly. They will not make up a rate just to suit you - the consumer.
For a much more comprehensive set of guides on what lenders can and can’t do we recommend looking at our Loan Issues and Law and Regulation section.
How UK law and legislation affects you
The industry is regulated, but some businesses operate illegally and outside of the legislation. People who approach the unregulated companies will not be able to receive the same guarantees offered by those who are fit and proper to lend money. For a much more comprehensive outline of all the current regulation that governs the payday loans sector we recommend you visit our Law and Regulation page. This page will allow you to get a very clear picture as to what laws and regulations govern the sector at each stage of the customer journey. We also have a section that focuses on the most recent legislation changes that govern payday loans.
What are people paying for their loans?
We have two areas of the site that mainly focus on questions relating to what are people paying for their payday loans. The main section we think you might find of interest is the Fees and Costs page. We also have a more comprehensive page that shows more broadly what the lenders in the market charge. This A-Z of Lenders page is what your payday loan from each different lender might cost you, in interest, fees and charges. It’s a fair guide, but will be confirmed when a lender accepts your application.
As a quick guide however and according to the regulator (FCA) lender’s interest rates and fees make them between 0.4% and 4% every day that a borrower owes money. The BCA are going to limit the cost cap to 0.8%. This means that some already charge rates under the average, but many are well above.
As an example, today, Wonga say they charge interest at 1% a day, with the addition of a £5.50 transmission fee. When you borrow £100 over 30 days, it will cost you an extra £37.15 to clear the debt on time. If you fail, the default fee is £20, but you can extend the loan for a £10 charge.
Over at the Money Shop, you will pay £29.99 for the same £100 loan, but their default fee is more at £29, but the interest rate is the same.
The FCA hopes that new legislation will save around £29 for each loan that a borrower completes.
The average consumer - no-one is average!
These are the figures that the average consumer is concerned with for their payday loan. Please remember that averages are simply those; they do not reflect the amount you may wish to borrow or the repayment schedule you may agree to.
The Consumer Finance Association takes their figures from Friends Provident/Policis and a Harris Survey during late 2012. They conclude:
- There are 240 lenders
- 1238 locations you can go in and make an application for a payday loan
- 4842 people are employed in the industry
- £2.5 billion changes hands between lenders and consumers each year
- This means that payday loans are equal to 1.2% of the loans industry, while
- 98.8% of loans are through the standard bank/credit card/building society, co-op channels, not payday lenders
- Where people have debt, the payday loan is about 15% of the total, with credit card debts being the other 85%
- The average customer is aged about 34 and has a salary of £17,582, but 24% earn less than £15,000 per annum
- 93% are satisfied with their overall experience
- 74% are satisfied at the value received
- 90% are satisfied with the clear information of the terms and conditions of the loan
- 85% are able to repay their loan successfully and on time
- 56% claim that a payday loan averted a crisis
- £260 is the size of the average loan
- 24% claim that a payday loan is their only option to borrow money
- 60% of consumers take out another loan with the same company within twelve months
- OFT - now the FCA - suggest that 30% of borrowers do not clear the debt as intended and ‘roll over’ their loan.
- The FCA (The Financial Conduct Authority) estimated that 1.6 million people took out around 10 million payday loans during 2013, valued at around £2.5billion. Over 50% paid more than originally expected in charges because they did not clear the debt on time.    
Be careful with the facts; they do not suggest that you meet the exact average criteria and will receive the same levels of services, fees and loans repayments. Being aware before making a decision is the best route for success.
Even where you do not require a payday loan at present, it is best to be well informed of the best choices in case the day should arrive when you need to make an immediate decision to solve an urgent problem – and require a payday loan.