If you took out a payday loan payment holiday because of coronavirus and it’s now come to an end it’s a good idea to get on top of the options available to you, especially if you’ve suffered a drop in income.
What is a payday loan?
These are expensive, short-term loans that were originally designed to tie you over until payday, hence the name.
The money is paid directly into your bank account, and you repay in full with interest and charges – at payday – or at the end of the month if you’re paid weekly or irregularly.
Usually you can only borrow for up to three months, and the amount you can borrow will be relatively small – up to around £1,000.
Interest and charges will be much higher than on a personal loan from a high-street bank.
However, ‘Total Cost Cap’ rules set out by the Financial Conduct Authority (FCA) mean that you never have to pay back more than double the initial amount you borrowed.
What was a payday loan payment holiday?
Until 31 October 2020 you can apply to your payday lender for a one-month freeze on your repayments – known as a payment holiday.
In addition to not having to make repayments, the following will have happened during the payment holiday:
- there will be no additional interest or charges
- even if your lender has refused to help you in the past, it’s worth asking again
- if you’ve already missed payments before taking a payment holiday, these charges will still apply.
Don’t worry about them during the payment freeze – they’ll be added to your payment plan and will still be subject to the Total Cost Cap.
Taking the payment holiday won’t have had an impact on your credit report, but missing future payments will. However, you should remember that your credit report isn’t the only thing future lenders will use to decide whether or not to lend to you.
If you didn’t ask your payday lender for a payment holiday, your agreement will have been expected to continue as normal.
If you took out a payday loan payment holiday because of coronavirus it likely will now have ended or be coming to an end.
What happens when your payday loan payment holiday is over?
Can I get a second payment holiday?
Unlike some other high-cost credit agreements such as for rent-to-own goods or pawnbroker loans, when your payment holiday is over you cannot ask for a new one. You can still ask your lender for help if you’re struggling financially.
Repayments will restart automatically after your payment holiday ends, but your lender should have contacted you during the payment holiday to confirm you can afford to meet these repayments.
The payments you’ve missed will be added to your balance. This means the amount you repay payments can go up when your payment holiday ends to cover the missed payments.
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Next steps if your income has dropped or you’re worried about making repayments
The coronavirus outbreak will affect many people’s finances, especially those who have been made redundant, placed on furlough or who have lost self-employment income.
If your income has dropped or you’re worried about making repayments you should discuss your situation with your payday lender as soon as you can and before your next payment is due.
They’ll be more willing and able to help if you’re proactive and explain your situation.
Make sure you’ve claimed everything you’re entitled to
Make an emergency budget
If you’re worried about cashflow, have a look at what you’re spending and what income you have coming in.
Look at how to cut your household bills, such as switching providers for your gas, electricity or mobile phone contracts.
Find out how to save money and increase income to help you catch up with your payments on the StepChange website.
Phone lines are very busy now. If you can’t get through, try emailing them or using online contact forms to put your query in writing. This could provide useful evidence later if a problem escalates.
What should I say to my payday lender?
You might feel nervous or embarrassed about asking for help, especially if you’ve never had to before. But lots of people are in the same situation, and firms are expecting calls from customers who have seen their income take a hit.
The sooner you get help, the sooner you can get back on track.
Think of the conversation as ongoing, rather than a one-off, until your finances are back on track.
What can my payday lender do to help?
If you continue to have money problems as a result of the coronavirus crisis, you may be entitled to extend your payment holiday if it’s in your interests.
Lenders must work with you to understand how likely you are to resume your payments once the payment freeze is over.
If you need more time, they should consider suspending, reducing, waiving or cancelling any further interest or charges. This could include allowing you to:
- further defer your payments
- make reduced or token payments.
You should consider applying for a reasonable period of time to allow you to recover from the financial impact of coronavirus, regardless of whether your account is in default or arrears.
If you don’t contact them, payday lenders will normally follow this process:
- they may first ask you to get in touch by writing to you or calling
- they will then usually issue you with a written ‘default notice’. This gives you an opportunity to arrange how to catch up with your missed payments
- if you don’t deal with the debt, the loan will ‘default’. This will usually be after two to three missed payments
- once the loan has ‘defaulted’, more interest and charges could be added – increasing what you owe
- if you still haven’t responded to them, your lender may go to court to seek a County Court judgment (CCJ) (called a decree in Scotland). A CCJ gives your lender more options to enforce repayment of the debt. Bear in mind that these measures can seriously affect your ability to get credit with other lenders in the future
- the debt may eventually be passed to a debt collection agency (also known as bailiffs or sheriff officers).
Next steps if I have missed a payment
If you have missed a payment contact your lender to explain your situation. You should avoid taking out more credit unless you know you can afford to pay it back.
When to get debt advice
If you’ve already missed payments and are not able to come to an agreement with your lender, it’s best to get advice as soon you can, especially if you’ve got other debts as well.
Find out more on the StepChange website about how debts are collected when you are in arrears.
Citizens Advice have more information about how to make a planopens in new window to pay your debts.
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