Many people realise they are in a spot of trouble with a payday loan and immediately think the solution is to go to another lender to borrow to money to pay off the first. But there are plenty of other ideas that might be useful for you rather than taking the first step in to what can become a never-ending spiral.
Legal stuff
Firstly, always have a basic knowledge of the legal stuff that can affect you in this situation. It doesn’t need to be the same standard as a financial advisor or someone who is an expert in the field, but a good idea of the basics never hurts. So remember these facts, as set in place by the Financial Conduct Authority (FCA) with effect 1st July 2014:
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Payday loan companies cannot roll over a loan balance on more than two occasions
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Payday loan companies have to provide any lender with an information sheet giving contact information for a range of debt advice organisations. This usually includes charities such as StepChange and the National Debtline as well as advice services such as the Money Advice Service and Citizens Advice.
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A lender cannot use the Continuous Payment Authority (CPA) more than twice to try to collect money that is owed to them. This means they try for the payment – it is refused. They can then try again but if it is refused again they cannot try a third time
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Lenders have to give prominent warnings on all promotions for financial products so people are aware of the risks involved.
What to do
Payday loans can be frightening when they are coming due to be paid and something goes wrong but the first step to take is not to panic. People often panic and go and take another loan to clear the first one, which in the long run doesn’t solve the problem. According to StepChange, there are some simple steps to take to get a handle on the problem.
Stop the CPA – a loan isn’t a priority debt, like a mortgage or your gas and electricity bills. When you took out the loan, the lender will have put a CPA in place but you have the right to stop this. If it is due that day, contact the bank. If it is between 1-5 days away or further than this, their website offer template letters to send to your bank. Also, notify the lender that you have stopped the CPA.
Offer to pay what you can – contact the lender and offer to make a payment of an amount that won’t leave you unable to buy food or pay essential bills, even if this is less than the original payment.
Seek advice – the mentioned charities and helplines can also help you set up a budget showing your income and expenditure and what you can afford to pay. Lenders tend to take this more seriously than if you are merely saying you can’t afford to pay the loan.
What are your options?
It may be that you can approach your bank for an overdraft or an increase on your credit card to cover the balance of the payday loan as in the long run the interest on these will be less than the payday loan.
There are also companies that offer credit cards for those with bad credit ratings where you can pay off the loan, pay the credit card regularly and begin the build up your credit rating once more.
The worst-case scenario may be bankruptcy: this is where your financial problems have reached a point of no return. It is a form of insolvency where unsecured debts are more than your assets such as house and car so you cannot sell things to raise the money you need. Bankruptcy means that creditors write off unsecured debts but there are severe restrictions for the next 12-month period until the bankruptcy is discharged. A record of the bankruptcy also remains on credit files for 6 years after the date and it is difficult to get credit in this time. Don’t forget that the myth about money being written off automatically after 6 years is just that – a myth. If you don’t do something about the debt, it will not simply go away.
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