This guide tells you how to deal with the common problems that often occur with payday loan debt.

Use this guide to:

• find out what a payday loan is and how they work; 
• look at advantages and disadvantages of a payday loan; 
• help you stop a continuous payment authority;
• deal with a loan rollover;
• apply for a refund of interest and charges; and
• find out alternatives to payday loans.

The sample letters mentioned in this guide can be filled in on our website.

What are payday loans?

A payday loan is a short-term, high-cost cash advance designed to be repaid on your next payday. While intended for quick help, these loans can spiral into persistent debt due to high APRs, rollovers, and continuous payment authorities (CPA). 

Someone may consider taking out a payday loan if they have an essential bill that they cannot pay or want to purchase an item they are unable to afford until pay day.  

Even though these loans are non-priority debts, they often cause other problems. The interest rates are usually very high and it can be easy for the debt to get out of control. Later in this guide we cover alternatives to payday loan borrowing. We also cover the other common issues with these loans.

A payday loan is a non-priority debt because you cannot lose your home, lose an essential service or go to prison for non-payment.

If you have debts and are considering taking out A payday loan, contact us for free debt help. 

Advantages and disadvantages of a payday loan

Advantages  

• They may help you in an emergency situation. However, it is likely that there will be cheaper and better options. Call us on 0808 808 4000 if you want to find a possible alternative to a payday loan. 

Disadvantages  

• The cost of borrowing (APR) will be very high. 
• If you need to borrow money to pay for something, it’s likely you may not be able to afford to repay the loan on your pay day.  
• You’ll have less money for your monthly bills once the loan repayment has been made.  
• You may be tempted to rollover the loan leading to higher costs. 

Payday lenders’ price cap rules

On 2 January 2015 rules were introduced by the Financial Conduct Authority (FCA) about how much payday lenders can charge.

• Interest and fees must not exceed 0.8% per day of the amount borrowed, even when rolled over.
• Default charges must not exceed £15. Interest rates on unpaid balances and default charges must not go over the interest rates of the initial amount borrowed.
• Borrowers should never have to pay back more in fees and interest than the original amount borrowed.

I cannot pay my payday loan

If you are in this situation, there are two things to watch out for.

1. Loan rollover

If you are struggling to pay at the moment, think carefully before borrowing again. It will only help if you can afford to pay more next month.

Some payday loan companies may offer you a loan ‘rollover’. This means that your loan is rolled over for another month, giving you extra time to pay. This may seem like a helpful solution if you are struggling to pay.

However, a rollover usually means you make a new agreement with the payday loan company. More interest and charges will be added, so you will owe more than you did before.

You should only consider a rollover if:

• your repayment difficulties are only temporary; and
• you are sure you will be able to clear the loan in full the following month. The FCA’s Consumer Credit sourcebook (6.7.23) states that firm must not refinance the agreement more than twice, unless it is exercising forbearance.

If a firm does refinance an agreement, it must send out an information sheet with specific warnings about borrowing more money and working out whether the agreement is affordable.

2. Stopping your payments

If your loan repayment due date is coming up, and you cannot afford to pay, you can take action to stop your payment being taken. The action you need to take will depend on the repayment method you agreed with the payday loan company. Your bank may not be able to stop the payment to the payday loan company if they are only given very short notice.

How to stop a payment

Direct debit – Where you give a company or individual permission to take money regularly from your account. You can cancel a direct debit by writing to your bank or using your internet or telephone banking service. It is also a good idea to notify the payday loan company.

Standing order – Where you give your bank permission to regularly pay a set amount to another account. You can instruct your bank to cancel a standing order by writing to it, or using your internet or telephone banking service. The latest you can cancel a standing order is usually before the close of business on the working day before the payment is due to be made.

Payment by cheque – If you have written a cheque to the payday loan company for them to cash on the loan payment due date, you will need to cancel the cheque. You can do this by writing to your bank or using your telephone or internet banking service.

Continuous payment authority (CPA) – Payday loan companies sometimes call these ‘recurring payments’. A CPA means you give the payday loan company your debit or credit card details, and permission for them to use the card to take a payment or payments, to repay your loan.

There has been a lot of confusion about CPAs and the right to cancel them. If you have agreed to repay your loan in this way, you can take action to stop the payment being taken. See the next section of this guide for more information.

If you are finding it difficult to contact the payday loan company, for example, because they are an online company, contact your card issuer. See the sample letter Withdraw your continuous payment authority from your card issuer. Your bank should stop the payment (or payments) being taken, even if you haven’t told the payday loan company.

Stopping a CPA

The FCA website explains your right to cancel the CPA. “In most cases, you should be able to cancel by contacting the company taking the payment and asking it to stop. However, you do have the right to cancel directly with your card issuer. Once you have done this, it must stop payments immediately – it cannot insist that you agree this with the company taking the payment first.”

The FCA also has a simple guide to your rights and bank accounts. It’s called Know Your Rights: banking.

Technically, you need to withdraw your consent for payment to be taken, rather than cancel the CPA. However, the result is the same, so don’t be put off if you hear different terms used.

To stop your continuous payment authority:

• Contact your payday lender to withdraw CPA. Use the sample letter Withdraw your continuous payment authority from payday loan company.
• Notify your card issuer in writing. Use the sample letter Withdraw your continuous payment authority from your card issuer.

If you withdraw your continuous payment authority and the money is still taken from your account, this is an ‘unauthorised transaction’. Your card issuer should give you a refund. This should include any interest or charges added to your account because the payment was taken. See Complaints later in this guide.

Stopping payments to the payday loan company may help you pay your essential bills and living costs, but it does not mean you no longer owe the money. You need to get full advice on how to deal with the debt in the long term. Contact us for advice.

In financial difficulties

The FCA’s Consumer Credit sourcebook (7.6.12) states that, where a customer is in financial difficulties, a firm must not request payment on a continuous payment authority more than twice on the same agreement once it has already been refused. If the customer later agrees that more payments can be requested, this rule does not apply.

How to get a payday loan refund

Claim a refund because of undue hardship 

The FCA says that payday loan companies must lend responsibly. This means that they must check that you can afford to repay the payday loan before they give it to you. If your loan was unaffordable, this might have meant that you:

• had to take out another payday loan to pay off the previous one;
• kept taking out bigger and bigger repayment loans;
• didn’t pay an important household bill you would normally pay so that you could repay the payday loan; or
• only managed to pay the payday loan by not buying enough food that month.

If repaying your payday loan meant that you had ‘undue difficulty’ in paying it back, you may be able to get a refund from the lender and some loans removed from your credit history. How much you might get depends on your circumstances when you took out the loan, but could include:

• interest the payday loan company added to your loan amount;
• charges the payday company added if you could not repay the loan on time; and
• an extra 8% interest if you take your complaint to the Financial Ombudsman Service (FOS).

Asking for a refund and for a loan to be removed from your credit history is normally a three-step process.

• Get the information about the payday loans you received.
• If you think that you were not treated responsibly by the payday loan lender, make a complaint to the lender that they did not lend responsibly to you.
• If you do not get a satisfactory reply offering a suitable refund, you can escalate your complaint to the FOS after the lender’s final response or after eight weeks, whichever is sooner. The FOS is a free, independent and confidential service. If you want to talk over issues, or how to get started with your complaint, you can ring the FOS on 0800 023 4567 or 0300 123 9123.

You can also find helpful information about payday loan refunds on Debt Camel’s website debtcamel.co.uk. Debt Camel has template letters that you can adapt and use to start your complaint with the payday loan company. Alternatively, you could use the Resolver website www.resolver.co.uk to make your complaint. If you need face-to-face help making your complaint, contact your local Citizens Advice office and ask them to help you.

Debt relief order (DRO)

If you get a refund from your payday lender while you are in a debt relief order, it could mean that it is revoked. Contact us for advice.

What to do instead of a payday loan

Before taking out a payday loan, consider safer options such as credit union loans, a budgeting advance or food banks. If you are struggling to repay your debts, consider a breathing space moratorium. 

You may have taken out a payday loan, or be thinking about it, because you are finding it difficult to manage. Our Making the most of your money guide has lots of tips to help you find help and save money. 

Lots of people get into debt because they are not getting all the help to which they are entitled. What benefits you might get will depend on your circumstances. Use an online benefits checker to check your entitlement, for example, the Benefits Calculator and the Grants Search tool on the Turn2us website www.turn2us.org.uk.

Your local council – may be able to help, but this will depend on their welfare assistance scheme. If you have claimed certain benefits but you have not yet been paid, you may be able to apply for a short-term advance from the Department for Work and Pensions (DWP).

Government help – you can apply for help with funeral or maternity costs, cold weather and winter fuel payments and in some cases, budgeting loans. If you are on Universal Credit, you can apply for a budgeting advance instead of a budgeting loan. There are rules about who can apply. Contact us for advice.

Credit unions – if you have a local credit union, you may be able to get a loan from them. Usually, but not always, they give loans if you have saved a certain amount with them first. You can search for a credit union near you at www.abcul.org.

If you need money for food, furniture or white goods, see if there is a food bank or recycling project near you. You can search for a food bank at www.trusselltrust.org. For furniture, electrical items and white goods, try Fair For You’s website www.fairforyou.co.uk. Your local advice agency, for example your Citizens Advice Bureau, should also have details of furniture and white goods schemes in your area. See Useful contacts towards the end of this guide.

Payday loan complaints

Complaint to your bank

If you withdraw your continuous payment authority, and payment is still taken, your card issuer should give you a refund. This should include any charges or interest added to your account because the payment was made. If they do not do this, or refuse to cancel the CPA, you can use your card issuer’s complaints process. You must do this first, but if you are not happy with the outcome, you can take your complaint to the Financial Ombudsman Service (FOS).

Complaint to your payday lender

You can also complain to the payday loan company. Ask them about their complaints procedure. The main payday lender trade associations have issued a ‘customer charter’ which sets out how their members should behave. If you are unhappy with the way your payday lender has behaved, the charter may help you make a complaint.

For example, the charter says lenders should warn customers at least three days before they try to take a repayment from your card. If you are having difficulty repaying your loan, the charter says that lenders should “freeze interest and charges if you make repayments under a reasonable repayment plan or after a maximum of 60 days of non-payment”.

Not all payday loan companies will be members of a trade association. Contact the relevant trade association to see if your lender is a member. See Useful contacts towards the end of this guide, or contact us for advice.

Complaint to the Financial Ombudsman Service

If you have made a complaint to your bank or payday lender and you are not happy with the response, you can ask the Financial Ombudsman Service (FOS) to investigate. The FOS plays a very important part in complaints. It does not have the power to fine or punish businesses, but it can help settle disputes between businesses and consumers. The FOS can look into your complaint, and can award compensation to you.

You have six months from the date of the final response to take your complaint to the FOS. Your bank or lender should tell you when their response is final. It may be their only response to your complaint. If you are not sure, ask them. If you do not complain to the FOS within six months, they may not be able to help. Time limits may also apply if what you are complaining about happened some time ago. Contact us for advice.

The FOS cannot help with all complaints. You will need to speak to them by phone or fill out their complaints form to see if they can help. See Useful contacts below.

FAQs

What is a payday loan? 

A payday loan is a form of high-cost, short-term credit that is repaid on your pay day. 

How do I cancel a continuous payment authority (CPA)?  

To cancel your CPA you’ll need to write to your payday lender and your card provider. You can use our sample letters, Withdraw your continuous payment authority from payday loan company and Withdraw your continuous payment authority from your card issuer.  

Can I get a refund if the loan wasn’t affordable?  

Your payday lenders should check whether your loan is affordable when you make an application to them, you may be able to claim a refund if your loan wasn’t affordable. See the Claim a refund because of undue hardship section of this guide for more information.  

What alternatives exist to a payday loan? 

Instead of taking out a payday loan you could consider speaking to your local council to see if they can help through their welfare assistance schemes. You could also contact your local Citizens Advice to see if they are aware of any schemes that may help you.  

The Trussell Trust may be able to help if you are struggling to afford food, and your energy supplier may be able to help if you are struggling with your energy bills.  

Our Making the most of your money guide has lots of tips to help you find help and save money. 

What happens if I can’t repay a payday loan? 

If you miss a payment to your payday loan it will be recorded on your credit reference file. If you are unable to come to a repayment agreement, the debt may get passed to a debt collection agency (DCA). DCA’s are not bailiffs and have no additional powers.  

The payday loan company is likely to try to continue to take the payment even if you can’t afford it, so it is important to stop any repayments being made. See the Stopping your payments section of this guide for more information. 

The payday loan company may look to obtain a county court judgement (CCJ) through the County Court. If you are struggling to repay your loan call us on 0808 808 4000 for free advice.  

Useful contacts

British Cheque and Credit Association (BCCA) Phone: www.bcca.co.uk

Citizens Advice Independent, free advice Phone: 0808 223 11 33 www.citizensadvice.org.uk

Consumer Credit Trade Association (CCTA) Phone: 0127 471 4959 Email: info@ccta.co.uk www.ccta.co.uk

Finance and Leasing Association Phone: 020 7836 6511 Email: info@fla.org.uk www.fla.org.uk

Financial Ombudsman Service Phone: 0800 023 4567 or 0300 123 9123 Email: complaint.info@financial-ombudsman.org.uk www.financial-ombudsman.org.uk