The cost of borrowing a payday loan
Payday loans are very expensive to repay hence one should not opt for a payday loan unless there are 100% certain you can repay it on time and in full – otherwise the costs can soon spiral out of control. If you’re thinking of getting one, here’s what you need to know.
How payday loans work
Payday loans are short-term loans originally intended to rush people over until payday. The money is paid directly into your bank account, and you repay in full with interest and charges – at the end of the month.
Increasingly though, you can borrow for longer periods, typically three months (but longer loans are available) and repay by instalments. What all these loans have in common is that they are high cost and short-term, and often for small amounts.
Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period. A payday loan is expensive and could make your situation worse if you can’t afford to pay it back on time. You need to think carefully before opting for one.
The rules limit the amount of interest and default fees you can be charged. Before agreeing to a loan, many payday lenders will ask you to set up a recurring payment (also known as a continuous payment authority or CPA). This lets them take what you owe directly from your bank account via your debit card on the repayment date.
This can be convenient, but it is risky. It might not leave you enough money in your account for other bill payments, such as mortgage or rent or other essential spending such as heating or food. And it could take you over your overdraft limit, leading to bank charges.
If you don’t feel a CPA will leave you in enough control, ask the lender if you can in other ways. You can cancel a CPA at any time although you will still owe the debt so need to repay in another way.