In this article:
- What is a payday loan?
- Can I get a payday loan with bad credit?
- If I don’t repay a payday loan can I go to prison?
- Are payday loans online only?
- What is the criteria to get approved for a payday loan?
- How do I know if I have been approved?
- What might I need a payday loan for?
- Why are people so negative towards payday loans?
- Do all payday loans cost the same?
- How fast are payday loans paid out?
- Why do I keep getting declined, I thought anyone could get a payday loan?
- Is there a way to see if I can get approved before applying?
- Should I compare the cost of payday loans?
- Can I get a payday loan if I am on benefits or if I am unemployed?
- Can I get a payday loan if I am self-employed?
What is a Payday Loan?
Payday Loans are small cash advances that are designed to help someone deal with an emergency that they may not have the funds available for. The loan is then repaid in full, with interest, on the customers next pay day.
The attraction of a payday loan is that it’s usually paid out very fast and people with some bad credit can usually get accepted. Customers also have the option of rolling the loan over to their next payday by paying only the interest due. Due to new legislation, this rolling over is now capped at a maximum of two times.
Payday Loans were prevalent from the late 2000’s up to around 2015 when the market shifted into Short Term Loans where you can spread the cost of the loan over a period of months. In 2020 the traditional payday loan, which used to have a maximum repayment period of up to around 45 days, is hard to find as a stand alone product, however, the term remains as a descriptor for the High Cost Short Term Credit industry.
Short term instalment loans are now referred to as payday loans as many of the traditional payday lenders have now moved into this new area of extended borrowing.
This is dependent on your definition of bad credit. One thing you must remember is that for the most part this industry is not built on lending to people with excellent credit scores and has therefore always served those with bad credit.
However, the market isn’t what it was several years ago and lending criteria has now tightened considerably following the introduction of the FCA and strict responsible lending rules.
That being said, payday loan products are still there for those with some adverse or bad credit so there is every chance you will be able to get a loan with some bad credit, however, severely bad credit – including CCJ’s and multiple other loans or defaults – will mean that you may either not be able to find a lender or you may have your options drastically reduced.
If I don’t repay a payday loan, can I go to prison?
It is extremely unlikely that you would ever go to prison for not repaying a payday loan but you should note that lenders may take court action to recover a debt and this could involve you attending court to explain why you haven’t been able to repay and subsequently receiving a CCJ if the court goes in the lender’s favour.
Having a CCJ is life-changing for many people as it stays on your credit report for 6 years and will stop you having access to most mainstream credit – including mortgages and loans. 6 years is a long time and many peoples lives turn around considerably during this time – having a payday loan CCJ on your credit file 6 years after defaulting can affect many of your life choices moving forward.
In 2020 lenders have a much stricter duty of care toward their customers and the market is a shadow of what it was even just 7 years ago. If you experience problems in repaying your loan you will find consumers have a lot more protection from the FCA now and lenders want to help their customers repay their loans, so speak to your lender and they will certainly help you get back on your feet without the need of courts and CCJ’s.
Are payday loans online only?
Some years ago, you would have been able to apply for a payday loan either online or in some high street shops. Now, short term credit is predominantly offered through online lenders. There are still, however, a number of high street lenders that offer loans.
H&T Finance are one of the UK’s largest pawnbrokers and they offer in-store loans, you can compare the cost of their loans right here on allthelenders.
With the cost of payday loans being so variable it’s always best to compare the cost of lenders online first as you’ll have access to a much wider market. Using in-store loans means you are restricted to that lender’s fees and you may not be getting the best deal.
What is the criteria to be approved for a payday loan?
When you apply for a payday loan, several things happen. The lender will assess the information you provide against their own internal ‘score card’ as well as running a full credit check. The score card is a set of criteria the lender puts together when they’re setting the business up, it is built taking into consideration the amount of risk the lender is prepared to take.
Some bigger lenders or those with considerable funds may have a more generous score card than smaller, independent lenders that cannot afford to take risk of lending to people with particularly bad credit.
All of this happens alongside a full credit check from one of the 3 major credit reference agencies. Once the lender has a thorough overview of your financial history and the risk you present, they’ll give you a decision – all of this happens in just a few seconds.
Whilst we never have access to lenders score cards or application criteria, there are some very basic requirements every applicant must meet which include:
- You must be over 18 years old
- You must be a UK resident
- You must have some form of income, for the majority of lenders this will need to be employment rather than benefits or pensions
- You must have a UK bank account with a valid debit card
This set of criteria would be the very minimum you’d need to meet before even starting an application for a payday loan.
How do I know if I have been approved?
When applying for a payday loan online, in most circumstances, you will be told instantly whether you have been accepted or declined.
In order for you to have the best chance of getting accepted and to get a fast decision it’s important that you provide the lender with truthful and accurate information. In some circumstances the lender may wish to manually underwrite the loan – this means that an actual person will review your application and make a decision.
This usually only happens when the automatic decisioning is unable to give a positive yes or an absolute no, probably because it has found something on your credit report that it is unsure about.
If your application has been accepted then you should be able to sign all of your loan documents online and the lender will deposit the funds into your account usually on the same day, depending on the time you apply.
If you are declined a loan, we strongly advise against making multiple applications to other lenders as you’ll be doing harm to your credit report. Here on allthelenders we have an Eligibility Checker which will tell you the lenders that would accept an application from you using just a soft search of your credit file (this means that it will not harm your credit score and other lenders cannot see the search, final offers from a lender would be subject to a full credit search).
What might I need a payday loan for?
People use payday loans and other short term finance products for a wide variety of things. Due to the high-cost nature of payday loans, it’s advised to only use them when you have exhausted all other options and they should be a last resort.
You should only borrow from payday lenders to cover emergency expenses or to cover a bill that simply cannot wait until you get paid.
Some common uses for payday loans include:
- Covering an unexpected bill
- Emergency car or home repairs
- Shopping or other household essentials
You should not use a payday loan for other activities such as:
- Socialising or going out
- Shopping for items that are not absolutely necessary
Why are people so negative towards payday loans?
Many people that use payday loans do so very privately and would rarely discuss the loan with their friends or family. There is a certain ‘shame’ that comes with the phrase and it carries annotations of ‘I’m desperate’, ‘I have bad credit’ or ‘I have inability to manage my finances’.
The reason payday loans make you feel like this is because of the way we have been conditioned to think about them, primarily through the media. Ever since their inception, payday loans have attracted negative press because of their high interest rates. APR’s often run into the thousands of percent and historically they have been in the tens of thousands of percent.
However, measuring the cost of a payday loan by using APR is not an accurate way to think about the cost – an APR takes into consideration the loan being taken over a full year when in reality a payday loan may be used for up to around 45 days at a maximum – this artificially inflates the APR that you see.
It’s not just the cost however. Payday lenders have often been shown as predatory lenders that prey on the vulnerable. In many cases this was true, in the early days of payday loans there were some shocking practices in play including:
- Lending to those that could never afford the repayments
- Applying crippling charges and default fees to their accounts when they inevitably defaulted
- Charging up to £35 for a missed payment
- Charging up to £35 to have the loan transferred to you on the same day
- Charging up to £5 for every time they failed to collect your repayment from your debit card on the due date and trying up to 20 times a day
- Aggressive and intimidating debt collection practices
- Allowing customers to roll their loan over (just pay the interest off) for months on end with no end in sight
- Charging up to £50 per month per £100 borrowed
- Allowing customers to have multiple loans at the same time or not properly assessing the customers affordability for the loan
Back in the early days of payday loans many of the above practices were rife and the OFT had very little control over what was happening. Payday lenders were a law unto themselves and therefore attracted extremely negative press. Although they lent to the most underserved people of the UK the predatory nature of payday lending really set the foundations for what was, and still is, a very difficult market to operate in.
Thankfully, the introduction of the FCA has transformed the market and it’s now one of the most regulated financial markets in the UK. However, the foul taste of the old payday lending market still lingers on and despite many of the original lenders now in the history pages the battle against negative press continues.
Do all payday loans cost the same?
No, they do not. When the FCA took over the regulation of payday lending in 2014 they swiftly introduced a price cap of 0.8% interest per day.
This means that for every £100 lent, you cannot charge more than 80p interest per day. So, £100 lent for 10 days at 0.8% per day means you would repay 80p x 10 (days) = £8.00 plus the £100 borrowed, so a total repayment of £108.
With the introduction of the price cap in 2014 many lenders stopped lending because of the price cap – many couldn’t see how it could be viable to continue lending at that rate. Many lenders did remain however and the price cap really saw the birth of the Short Term Loan industry which has now all but replaced the payday loan industry.
It was presumed that when the price cap came in to play that all lenders would automatically charge the maximum possible, resulting in almost no competition amongst lenders.
allthelenders started in 2015 and we were the UK’s very first price comparison website for high cost short term credit – we wanted to stimulate competition between lenders which results in a better outcome for consumers.
Very quickly lenders started to lower their rates in order to be higher up the comparison table and now we are seeing rates as low as 0.2% for some longer term loans.
This simply highlights the importance of comparison not just payday loans but all types of loans and credit before taking the first offer or simply going with the household names you may know of.
How fast are payday loans paid out?
Many may not know or consider it, but short term and payday lenders are at the very forefront of fintech and financial system developments. Many of them are pioneering new technology or embracing new tools that come to market and lead the way for many other financial institutions – this includes use of the faster payments service.
Much of the industry was built on the convenience of getting a payday loan and more importantly the speed at which they could get money into their customers bank accounts.
This made payday loans particularly attractive to those that wanted cash fast. Payday lenders embrace not only the faster payments technology but also sophisticated decisioning tools that enable them to make loan decisions instantly and allows loans to be agreed and paid out without the need for human intervention.
In the vast majority of cases, once your loan has been approved then you’ll get your money within around 30 minutes, but this depends on the time of day you apply and the funding times of the lender. Some lenders fund only during office hours and some 24/7.
Why do I keep getting declined, I thought anyone could get a payday loan?
As we have mentioned before, lenders keep their acceptance criteria very private so whilst there is no way to give a guaranteed answer, we can look at some of the most common reasons people are declined for a payday loan:
One of, if not the, most common reasons customers are declined credit. If the lender considers the loan may put you into financial difficulties you will be declined. This is assessed on the information given in your credit report against the information you provide on your application, it takes into account your incoming vs your outgoings and the surplus that is left.
Since the FCA took over regulation the markets lenders have been under extreme pressure to increase affordability. More recently some of the biggest lenders in the UK, including Wonga, have fallen due to the number of people claiming they were sold loans that were unaffordable. In order to avoid a similar fate in the future lenders are now taking an extremely cautious approach to affordability, arguably cutting out some of the demographic these very products were built to serve.
A very common reason loans are declined in this industry is fraud. Lenders are using increasingly advanced methods to ensure they’re lending to who you say you are and will use credit reference agencies to cross check all of the data you provide in the application form.
Linked very much to affordability, lenders will no longer consider lending to you if you have multiple outstanding payday loans or short term loans. Years ago you would have had more chance of getting accepted but due to much stricter affordability checks it’s very unlikely you’ll be given further credit.
It’s a very common misconception that anybody can get a payday loan, in fact less than 5% of applicants actually get accepted and end up with a loan.
Is there a way to see if I am approved for a loan before applying?
Yes, the growth of the ‘soft search’ has been exponential in recent years, particularly in the credit card market where you can see if you’ll be accepted before making a full application.
This is the exact same technology we use here on allthelenders – you can submit some basic information and we’ll search our huge panel of lenders and return a result to you showing you which lenders would accept you if you were to make a full application with them.
The benefits of this are that you do not have to submit multiple applications to lenders so you’re credit report stays intact and you get the pick of the bunch, you can get the best deal! The soft search also doesn’t show on your credit report to other lenders so it will not stop you getting credit afterwards.
Should you choose to proceed with a lender that accepts you either through our eligibility checker or through any other checker, it’s important to remember that the lender will perform a full credit check and this will show up on your credit report. During the full search, if something shows up that the lender wasn’t expecting or couldn’t see during the soft search they may still decline the application.
Should I compare the cost of payday loans?
Choice is a privilege and one that should be used, particularly when it comes to financial products. You wouldn’t take our car or home insurance without looking on a price comparison site first so why do the same with a loan – whether that be a loan 1 month or 5 years?
The power of the consumer is in choice, you have the control over the lender you want to have your business – of course, you want to get the best deal possible. When we are talking about high-cost credit such as payday loans this is even more important.
allthelenders is one of the leading price comparison sites for payday loans in the UK – everything we do is with the best interests of the consumer at heart – we want you to get the best deal!
Can I get a payday loan if I am on benefits or if I am unemployed?
Payday loans are high cost credit and are not advised for those on limited or restricted incomes. It is more that likely that a payday loan will put you in a worse financial position than before you took it, so many lenders will not accept applicants that are not employed.
However, there are a small number of niche lenders that may consider those on benefits.
Can I get a payday loan if I am self employed?
Yes, you can. Some lenders simply do not have the appetite to lend to self-employed workers and this purely comes down to risk, they are not prepared to take the risk of your income suddenly dropping.
However, the good news is that many lenders do lend to the self-employed and below is a selection of the lenders we work with that would consider an application from a self-employed worker.