What is Payday Loan Debt?

Payday loans are short-term loans usually with high interest rates that give borrowers fast access to relatively small sums of money. They are designed to provide funds until your next payday arrives, at which point the loan should theoretically be repaid in full.

While payday loans may seem like an easy fix when you need money fast, they can create more long-term financial headaches than solutions. Keep reading to learn more about how payday loans work, why they can be problematic, and what your options are if you find yourself saddled with payday loan debt.

How do payday loans work?

Payday lenders operate both on the high street and online. To take out a payday loan, you normally need to provide proof of income and a bank account in your name. The lender will then offer you a loan, usually between £100-£1000, that must be repaid on your next payday.

Some key features of payday loans include:

01. High interest rates

Payday lenders typically charge interest at extremely high rates, often 0.8% per day. This equates to staggering annual percentage rates (APRs) of between 1000-1500%. Compared to typical credit card interest rates of 25-30%. The cost of borrowing through payday loans is exponentially more expensive for consumers.

02. Short repayment terms

Payday loans are designed to be repaid extremely quickly, usually coinciding with the borrower’s next pay date. This leaves very little time (often only 2-4 weeks) to repay the full sum borrowed plus the interest accrued within this short period.

03. Rollover loans

If a borrower cannot afford to repay their payday loan in full by the due date, the payday loan lender may offer to roll the loan over to the next month. This avoids default, but extends the loan term further, with additional interest and charges added on top of the existing balance. Repeat rollovers can quickly lead to debt spiralling out of control.

Why do payday loans lead to debt problems?

There are several reasons why payday loan debt can quickly snowball out of control:

01. Short repayment terms

The short repayment terms make it very difficult to repay the full sum borrowed plus the interest in such a short timeframe. Many borrowers struggle to find the money to repay their payday loan on their next pay date as agreed, which is often only 2-4 weeks away.

This leaves them unable to afford the repayment, forcing them to either take out another payday loan to cover the existing one and extend the term, or rolling the loan over, both of which incur additional interest and charges.

02. Lack of affordability assessments

Payday lenders rarely complete thorough checks on affordability before approving loans. They provide funds without sufficiently determining in detail whether borrowers have the financial means to repay the debts in the short timeframes demanded.

This lack of affordability assessments enables loans to be given too easily to those who realistically don’t have the capability of repaying them.

03. Encouragement of repeat borrowing

Rollover loans and repeat loans are actively encouraged by payday lenders through marketing and incentives. This results in borrowers taking out multiple payday loans simultaneously as new ones are taken each time existing loans can’t be repaid. As the interest is compounded on each outstanding loan, it can lead to debt spiralling out of control.

04. The ease of convenience of payday loans

The ease and convenience of payday loans online has dramatically increased impulse borrowing. Payday loans are marketed as quick fixes when borrowers are in immediate need of cash, but the long-term reality can often be unsustainable debt burdens.

What happens if payday loans aren't repaid?

Failure to repay payday loans can lead to your outstanding debts being passed on to debt collectors, who may use aggressive tactics to recover the money. This can include frequent phone calls, letters, and visits to your home. You will also incur additional late payment fees and rollover charges imposed by the lender. This increases how much you owe and will affect your credit score, which is likely to make accessing any further credit much more difficult.

If debts remain outstanding, the lender could take legal action against you to recover the sums owed. For example, they may apply for a County Court Judgement (CCJ) ordering you to repay or send bailiffs to your home to seize possessions.

In the most severe cases of unaffordable debt, an option such as bankruptcy or an IVA may be suitable, both of which will be recorded on your credit file for 6 years.

It’s critical to address any payday loan repayment issues promptly before they spiral out of control. Seeking professional debt help is advisable if you are struggling to repay the loan.

How to manage payday loan debts

If you’ve found yourself caught in a payday loan debt cycle, here are some tips that may help:

• Stop taking out any new payday loans immediately. This will prevent your situation from worsening.
• Speak to your lender explaining you're struggling with repayments. They may be able to offer some leniency.
• Prioritise paying rent, bills, food and other essentials first. Pay as much as you can towards debts with what's left.
• Look at your budget and see where you can make cutbacks on any non-essential spending. Freeing up more money can help tackle debts.
• Avoid taking out other forms of credit that could make juggling repayments more difficult.
• Consider requesting a payment plan if the lender won't freeze interest or charges. This can make repayments more manageable.
• Speak to a debt charity or advisor for guidance tailored to your situation. They can explain your options.

Seeking help early is key – don’t wait until debts have already spiralled. Even a single missed or late payment will be recorded on your credit file, so prompt action is wise.

Get debt help from DFH Financial Solutions

Here at DFH, our caring advisors are on hand to provide personalised debt help tailored to your unique circumstances. If you’re feeling overwhelmed repaying payday loans alongside other unsecured borrowing, we could assist you.

Our team has years of experience matching people across the UK with Debt Management Plans built around their specific needs.

To take the first step and learn more about how DFH Financial Solutions can help you tackle your payday loan repayments, contact our friendly experts today.