What happens if you can’t repay a payday loan

financial stress

Payday loans can be excellent in times of need. Access to funds once your application has been approved can be transferred to you within a matter of hours, meaning that you can quickly use the money in a financial emergency, with the process itself being simple and straightforward to use compared to other financial products that are available on the market.

However, what happens when for some reason or another, you find yourself in a situation where you are unable to make repayments on a payday loan? When it comes to secures loans like logbook loans, mortgages and second mortgages, when you can’t repay, ultimately the lender will start proceedings to seize the asset the loan is secured against, but when it comes to payday and unsecured loans, things are different (source: The Second Mortgage Company).

According to a survey conducted by Which? In recent years, around half ofthose people who took out payday loans had difficulties paying them back, but why does this happen, and what are the consequences? We take a further look.

How do repayments with payday loans work?

Typically, when you take out a payday loan, you agree upfront with the lender the amount that you intend to borrow, with the timeframe in which you will make the repayments agreed at the same time too. For example, you may decide to get a payday loan for £200, and agree to pay it back in two weeks’ time.

In the majority of cases, you will not repay through ringing up with your bank account details or by cheque. Most payday lenders will automatically debit the amount from your account (including the interest) from your account on the day that you mutually agreed to pay the money back (usually at 5am on the day of collection). This is otherwise known as Continuous Payment Authority (CPA).

Consequently, when you have decided to apply for a payday loan, you need to make sure you have carefully read the terms and conditions before applying, making sure that you know that there will be enough funds come repayment day, as it is your responsibility do so. Hence, if you are for example employed on a contract basis by an umbrella company whereby your salary is paid on a set day each month, you should check that there will be enough in your account to make the required payments before signing up to the loan in question (source: Transparent Umbrella Company).

What happens if there is no money?

Lenders will usually try to collect payments for as long as it takes in order to recuperate the original amount plus interest. This also goes for the situation where you do not have enough to cover all the debt, but only some. If you have had other previously pay loans back on your behalf, you need to be aware that some lenders could take money from their account to settle the outstanding debt.

Interest on charges if money is overdue

You may find that if you are unable to make repayments on a payday loan, you will be subject to charges. This can include a late payment fee (depending on the payday loan provider this may be between £12 and £20). It also means that the loan will continue to accumulate interest, which can be 1% a day. Nevertheless, the exact amount you will have to pay back if you make late repayments does depending on the lender.

It damages your credit file

This is one of the main reasons why you should always think responsibly before taking out a payday loan. If you do not know how to pay it back and end up defaulting on payment this can end up damaging your credit file. That has negative consequences in terms of your ability to gain further credit in the future, whether that be for credit cards, a mortgage on a home, another loan or even getting a mobile phone contract.

What should I do if I can’t repay my payday loan?

Your first port of call should be to talk to your payday lender as soon as you know that you are going to have difficulties paying back your loans. This way, you may be able to organise a repayment plan that is more manageable with them.

If you are struggling with a number of different bills, or are having difficulties coming to an agreement with your payday lender about paying the loan back, contact one of the free, independent and confidential debt advice services. They can help you to negotiate with the lender, doing so on your behalf, and then can also help get all your debts under control.

There are a number of different debt advice services available to people in England, Scotland, Northern Ireland and Wales, such as:

National Debtline
StepChange Debt Charity
Citizens Advice
Advice NI

Remember, if you do decide to work with a debt adviser, you should make sure that you have informed your payday lender that you have done so. It is also worth making sure that you not only phone the lender and also write a recorded letter to them, so you have a paper trail of your actions.

Furthermore, if you find yourself dealing with an unresolved complaint, you can contact the Financial Ombudsman Service, which deals with difficulties between customers and providers of financial services.