A payday loan is a type of short-term loan that can help you cover immediate cash needs until you get your next payslip.

You can get a payday loan online or via brick-and-mortar locations. When you don't have a financial cushion in place and you need quick cash, a payday loan might seem like a good solution. However, using a payday loan to get out of debt could be a costly mistake.

Most lenders don't perform a credit check before granting a payday loan.

Typically, they ask the person:

• to prove they've had a job for the last three months
• to provide proof of their address, such as a utility bill
• to provide them with their current account information.

A Payday loan repayment period is usually short and depends on your personal situation: it typically ranges from 14 to 28 days.

The Financial Ombudsman Service recommends that you’re well informed on how exactly your loan will work. For example, you need to be clear about how much you are borrowing, how much you must pay back and how many days you have to pay it back.

Factors to consider when getting a Payday Loan are:

Cycle of Debt

When your financial resources are low, getting a payday loan might help temporarily. But ultimately, all you're doing is positioning yourself to sink further into debt. some lenders will allow you to pay the initial fee only to extend the due date. But, then another fee for the same amount is added.

Fees are capped

Interest rates are capped at 0.8% a day and the FCA has said that a borrower will never pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

Repeated Collection Calls

Because these high-risk loans are also expensive, you might not be able to pay off your loan in a timely manner, which could result in repeated calls from debt collectors. This can lead to some people becoming evicted from their homes and it may also affect their mental health.

FCA REGULATIONS

A driving force behind why the industry has declined so much is because of new rules implemented by the Financial Conduct Authority. This was started in 2015 and was an industry-wide clampdown on fast and wild lending patterns established by some lenders. It established clearer rules and they stood as regulators of the market for better lending practices.

The new rules introduced by the FCA were to put a limit on the number of payday loans a person could take out at once, the number of times that a loan could be rolled over and introducing a tougher lending code on payday loan websites. Including affordability checks and warnings being mandatory across all websites offering the service.

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