Payday loans are popular, but they are an expensive way of borrowing money. If you don’t keep up with your loan repayments you can find yourself in serious financial difficulty. In this guide we have set out our guide on payday loans. We explain what they are and some of the risks of entering into a payday loan. MoneyLifeline Says: These are loans of last resort. Avoid them if you can. Given the current state of the economy it is hardly surprising that payday loans are popular. But are they right for you? In our opinion these types of loans should only be taken out as an absolute last resort. Avoid them if you can. Remember to always take professional advice before entering into any kind of loan commitment. What is a payday loan, and who lends the money? Payday loans are loans made for a short period of time. The interest rate is high, which means that the amount repaid is more than would be paid on a bank loan. The purpose of the payday loan is to help you get by, financially, until the next payday. The loans are usually made by payday loan companies. These are organisations which lend money to vulnerable people at astonishingly high rates of interest. Many payday loan companies are employing bad practices in the way in which the loans they make are administered. In fact, the Office of Fair Trading previously warned some payday loan companies that they need to stop all the poor practices they carry out, or risk being closed. Why are payday loan companies booming? Because the current economic climate is tough, thousands of people are turning to payday loan companies as a means of getting money quickly. The problem with payday loan companies is that the interest rates charged are often so ridiculously high that the customers who borrow money are unable to pay back the money borrowed. As a result, the interest charged stacks up very quickly. This means that the debt can very quickly spiral out of control. The thing that attracts millions to take out a payday loan is that the cash borrowed can be in your bank account on the same day as your application for a loan. This is quicker than the main banks. Unfortunately, the convenience and quick availability of the loan makes people overlook the high rate of interest. The high interest rate is the price paid for quick cash! How do payday loans work? Simply put, payday loans are short term loans given to people who have run out of money and are not able to make it to the next pay day. The loans offered range in size, but are typically from £100 to £500, or even higher. The loan is typically for a period of 31 days. What is often overlooked is the interest rate charged on the loan, which is almost always higher than the rate charged by banks and credit card companies. In some cases, the interest on a loan can be more than 3000%! The reason the rate of interest is so high is because these loans are meant to be short term loans which are paid back quickly. What happens if the loan is not repaid on the due date? Because the rate of interest is so high, if the amount owed is not repaid on the due date, the debt owed very quickly increases in amount. Before long, the amount of interest owned is many times greater than the amount of the original loan. What are CPA’s? CPA stands for “Continuous Payment Authorities” which is a mechanism used by payday loan companies to take money out of a borrower’s debit or credit card to cover the amount of the loan. The payday loan company often has the option to change the amount taken. A CPA is more difficult to cancel or amend than a direct debit. The OFT has issued guidance on CPA’s which required the payday loan company to obtain the specific consent of the borrower before using a CPA. The OFT has indicated that money should not be taken unless there are funds in the account to cover the amount taken. Why should I use a payday loan company? This site does not in any way condone borrowing from payday loan companies. Such loans are loans of last resort and should only ever be considered before all other options have been fully explored and only if you have the money available to pay back the loan at the end of the term. If you don’t pay back the money borrowed, the interest with rack up and will soon become an uncontrollable debt. What is the government doing about payday loan companies? The Office of Fair Trading is now investigating a number of payday loan companies. In November 2012, the OFT released a press release in which they confirmed that formal investigations into several payday loan companies. The OFT has warned than many of the payday loan companies have failed to meet expected standards of behaviour and as a result, such companies could be shut down. What happens if I can’t repay the payday loan company and I can’t cope? If you have completely lost control of your finances and the amount owed to a payday loan company is spiralling completely out of control, you must seek immediately professional help. There are a number of free advice services (Citizens Advice Bureaux and Step change) which can provide free debt advice.