What are payday loans?

Many people take out payday loans to bridge the gap between receiving an unexpected expense and when their wages land in their account. Paying for urgent car repairs or fixing something that has broken in your home sometimes can’t wait until your wages arrive in your bank account, and so a payday loan can help you cover this cost while you wait for payday to come around.

Sunny’s broker partner provides access to a short-term loan panel that offers all the same benefits you expect from a payday loan, in values from £100 to £2,500 – covering a wider range of emergency situations.

A payday loan is usually used to cover the cost of an unexpected expense you may be dealing with. Borrowing of this type is an expensive form of credit that, while useful in some situations, isn’t suitable for long-term financial needs. However, there are a few circumstances when you should not use a payday loan. These include:

• Purchasing anything you don’t urgently need: This could be an expense such as a holiday or something new for the home. These are the sort of things you should save up for over time.
• Paying off another loan: If you are struggling with debt, it’s important you seek free and impartial debt advice and do not borrow any more money until you have done so. Contact a not-for-profit debt advice organisation such as StepChange or take a look at the Money Helper website.

A payday loan, as with all kinds of credit, will be listed on your credit report while you are making payments, and once it is paid off in full and the account is closed, then it will be listed as such. Lenders you apply to borrow from in the future will be able to see the record of the loan. If you miss any payments, make them late, commit to an alternative repayment plan with your lender or default on the account, these activities will also be reflected on your credit report and can stay listed for up to six years.

A payday loan repaid in full will be recorded as such on your credit report and contributes towards the overall impression you give to lenders you may apply to in the future. Generally, if you can demonstrate that you’ve had credit and you’ve repaid it in full and on time, this will be considered a good thing by lenders you apply to.

However, in some cases, with mortgage lenders for example, seeing evidence that you’ve used payday loans in the past can cause you to be automatically ruled out, even if you repay your loan in full and according to your agreed repayment plan.

If you want to know how a particular lender would view your use of payday loans, you should speak to them and make sure you understand the impact of choosing to borrow with a payday lender before you make any decisions.

Payday loans should always be reserved as a last resort, used when you’ve exhausted all other options, and not taken out as a means of building your credit profile and history. If your primary goal is to improve or rebuild your credit score and your need for cash isn’t urgent, then there are a number of ways to do this, including dedicated “credit builder” loans available to help you.

In January 2015, the Financial Conduct Authority (FCA) introduced a set of new rules to regulate the high-cost short-term credit sector, often referred to as payday loans. Lenders can charge a maximum of 0.8% interest per day and late payment charges are capped at £15.

The FCA also imposed a cap on the total cost of credit, meaning that if you borrow from a payday lender, you will never pay back more than double the amount borrowed, including interest and fees.

You may have read about this on sites such as the Money Helper. It’s definitely something to be aware of before applying for a payday loan. The payday loan trap is the term used to describe the process of repeatedly borrowing from payday lenders, borrowing from one to pay another, creating a circle of borrowing that essentially rolls the original loan from month to month.

Borrowing in this way can quickly become unsustainable. As each lender you borrow from will add interest, the amount you owe can quickly mount up and become unmanageable. If you ever miss a payment or make it late, you could also be subject to late payment fees, exacerbating the situation.