What Type of Debt is a Payday Loan?
Payday loans offer a means of accessing quick cash in an emergency, but these usually high-cost, short-term loans also come with risks – they can easily create a debt spiral if repayments are missed. So, what is payday loan debt? And what can you do if payday loan debts are becoming unmanageable?
What is a payday loan?
A payday loan, sometimes called a cash advance, is a small, short-term unsecured loan designed to tide you over to your next payday. Payday lenders provide loans ranging from £50 to £1,000+ that are repaid on your next pay date, typically within 1-4 weeks.
Lenders often do not carry out stringent credit checks, making payday loans easy to access for those with poor credit scores who may struggle to get other forms of finance. However, the ease of access often comes at a price.
What happens if you can't repay payday lenders?
Missing payday loan repayments can have serious consequences:
- Additional fees - Every missed or late repayment will result in extra fees being added to the payday loan debt, increasing the total amount owed.
- Debt collectors - After several months of non-payment, payday lenders will typically pass accounts over to debt collection agencies. These agencies will then pursue borrowers to try and retrieve the money owed.
- Continuous Payment Authority (CPA) - Payday lenders can set up CPAs on borrowers' bank accounts. This allows them to continue taking payment attempts even after borrowers have defaulted.
- Legal action - As a last resort, payday loan lenders may threaten court action like County Court Judgements (CCJs) against borrowers who have defaulted.
- Damage to credit rating - Every missed and late repayment will stay on borrowers' credit files for 6 years, severely lowering their credit score. A poor credit score makes accessing new credit like loans, cards, and mortgages more difficult.
- Stress and anxiety - Being chased by lenders and collectors can be stressful. Mounting unpayable debts can take a heavy toll on mental health and wellbeing.
Is a payday loan a priority or non-priority debt?
Payday loans are generally considered non-priority unsecured debts. This means they are not linked to any asset that can be repossessed if you default and should be repaid after priority debts like rent, mortgage, utility bills and taxes.
However, given their short repayment terms, payday loan companies may refuse proposals that extend the repayment time frame through solutions like Debt Management Plans (DMPs). Some may prefer to recover debts through internal repayment plans instead.
Nonetheless, speaking to a debt advisor is always advisable before repaying payday loans at the expense of priority debts. Having all the facts can help you make the most informed decisions.
How to manage payday loan debt
If you are struggling with payday loan debt, here are some tips:
01. Speak to lenders
Contact your lenders, explain your situation honestly, and ask them to stop interest and fees temporarily to give you a chance to repay. Ignoring communication is likely to worsen matters.
02. Seek free debt advice
Reach out to a reputable debt charity or advisor. They can help assess your budget, suggest ways to maximise income/cut costs, negotiate with lenders, and recommend debt solutions suited to your specific circumstances.
03. Prioritise essential living costs
Ensure priority debts such as rent, utilities and council tax are paid first to maintain your basic needs. You may have to miss payday loan repayments – if so, speak to lenders first.
04. Avoid further borrowing
The urge to take out more credit as a quick fix is understandable. But any new loans will increase your overall debt level. Try alternatives first like asking for help from family or taking on part-time work.
05. Combine repayments
If you have payday loan debt with multiple lenders, consider consolidating them into one lower monthly repayment through a debt solution like a Debt Management Plan. This simplifies budgeting.
06. Consider alternatives
Are there ways to raise cash without resorting to high interest borrowing, eg: selling unwanted possessions, extra work, or requesting hardship grants? Explore all options.
How can Debt Management Plans help with payday loans?
If you have payday loans debts alongside other unsecured credit like credit cards or overdrafts, a Debt Management Plan (DMP) could help consolidate all repayments into one affordable monthly payment.
A DMP is a voluntary agreement between a debtor, creditors and a plan provider. After conducting a personal budget assessment, the DMP provider negotiates reduced payments and freezes interest on your behalf.
Benefits can include:
Making debt more manageable through lower monthly payments
Freezing interest and charges
Having one predictable payment per month
The DMP provider liaising with creditors for you
An agreed finish date for repaying the debts included in the plan
Debt Management Plans can help organise finances and make debts more affordable. However, they aren’t suitable for everyone as there are disadvantages such as creditors do not have to agree to the plan and debts are repaid in full so repayment make take longer. Other debt solutions are also available and may be more suitable. Speaking to an experienced advisor is key before entering into any agreement.
Get debt advice today
Here at DFH Financial Solutions, we understand that debt worries can feel overwhelming. Our advisors have extensive experience helping people across the UK to regain financial stability.
We’ll listen to your unique circumstances and provide tailored debt advice to help you. If a DMP may be suitable, we’ll create a plan built around your budget and needs.
Don’t struggle alone – help is available. To take positive steps towards resolving your debts, apply online or contact our friendly experts today.Apply Now