Payday, Guarantor and Doorstep Loans
The factsheet is to provide specific advice on payday, guarantor and doorstep loans. It will help you understand how these different forms of lending work, the common problems that often arise with, how a debt solution may affect these loans and how to help you make a complaint about these types of loan providers.
1) Payday Loans
A payday loan is a high-cost, short-term loan, usually for a small amount. They are paid into your bank account and you repay them in full with interest and charges when you next receive your wages or benefits, on a date chosen by you. These debts are unsecured and non-priority however as the interest rates are usually very high it can be easy for the debt to get out of control if it’s not paid back quickly.
Common practice now is for payday loans to be available for long repayment periods, up to three months, and the ability to repay in instalments over the repayment period. A payday loan given on the understanding it will be paid back when the person gets their next pay. With the agreement of the payday loan company this can be extended however interest will be added until the loan is paid.
A payday loan can be a very expensive form of credit and if you are unable to repay it back in the timescale you have chosen, it can make your financial situation worse. You should always be mindful before obtaining a payday loan and evaluate if you have an alternative option or if you really need to borrow the money.
You should never use a payday loan to pay or settle other existing debts. The amount of interest charged by payday loan companies is more than that charged by other loan companies. You would be better seeking advice and make token offers of payments of even £1 to your creditors until your financial situation improves.
The cost of payday loans has been capped by the Financial Conduct Authority since 2015, but the interest change can still vary. The maximum amounts that payday lenders can charge are:
- Interest capped at 0.8% per day
- Default charges capped at £15
- Interest rates on unpaid balances must not exceed the interest rates of the initial amount borrowed
- The borrower will never pay back more than twice the original amount borrowed
2) Repaying a payday loan
When obtaining a payday loan you can be asked to set up a recurring payment or a Continuous Payment Authority (CPA) with the creditor. By doing so, you are giving the payday loan creditor permission to take what you owe directly from your bank account on the repayment date. You lose control over the repayments and if you have not budgeted correctly, or forget about the repayment being taken, you could be left with not enough money in your account to cover other essential payments such as food and utilities. You can stop a recurring payment or CPA, but to do so, you need to withdraw your consent for payment to be taken, rather than cancel the CPA.
To withdraw your consent you must:
- write or email the payday loan creditor informing them that you are withdrawing your permission for any further payment to be taken from your card
- write or email your bank informing them you are withdrawing your permission for money to be taken from your card by your payday loan creditor
We have templates at the end of this factsheet for writing to the payday loan creditor and your bank to withdraw your permission for any further funds to be taken.
If you withdraw your consent and payment is still taken from your account, this is an ‘unauthorised transaction’. Your bank should give you a refund and this will include any interest or charges added to your account as the payment was taken without your permission.
The Financial Ombudsman Service has more information about cancelling a Continuous Payment Authority (CPA).Back to top
3) If you cannot afford your payday loan
If you are having difficulties at repaying a payday loan, you have two options:
- Loan Rollover: The payday loan creditor will offer a rollover which extends your repayment term for another month, giving you more time to pay. A rollover means further interest and charges giving more to repay. The FCA rules on payday loans means creditors can only rollover the debt twice.
- Stop repayments: If you cannot afford to repay, you can prevent the money being taken from your account by contacting your bank and the payday creditor. The payment request may not be stopped with very short notice.
4) Guarantor Loans
A guarantor loan is when another person, such as a friend or family member, guarantees to repay a debt if you default on your repayments. To be a guarantor, you usually must not be financially connected to the borrower, such as a spouse or partner. Guarantor loans are usually obtained when someone with bad credit applies for a loan and the creditor refuses to offer without another person guaranteeing the debt.
Having a guarantor assures the creditor they are more likely to get their money back as the guarantor will repay the loan if the original borrower fails to do so. Creditors sometimes require the guarantor to be a homeowner to demonstrate that they have assets to potentially cover the loan if they were to default on it as well.
Like all types of debt the interest rates charged can vary, however guarantor loans generally have a higher rate of interest that a standard loan to reflect the borrower’s poor credit history and the additional risk to the lender.
If you have a poor credit score, then a guarantor loan can be an easy way for you to obtain credit. Repaying a guarantor loan with no difficulties will help improve your credit score and will make it more likely you will be accepted for credit in the future without needing to use a guarantor.Back to top
5) Applying for a guarantor loan
The creditor will ask the applicant and the guarantor to read and sign separate agreements, and ask for separate bank details for both. They usually will pay the loan monies into the guarantor’s bank account, who can then forward it onto the original borrower. This is a safety measure so the guarantor is aware the loan has been applied for in their name, and to prevent the guarantor from being unaware that a loan has been taken without their knowledge.
The original borrower will then maintain monthly repayments, and the guarantor has no contact with the creditor, unless the borrower defaults on the loan.
The advertised interest rate for a guarantor loan may increase on application for the loan. It is important to check the rate offered before agreeing to the loan. To secure a guarantor loan, you’ll need to be at least 18 years old and the guarantor generally needs to be over 21 years old and have a good credit rating.
If you enter into an arrangement with creditors, formal or informal, the loan company will default your loan and contact the guarantor to maintain the original repayments.
If the arrangement you enter into is formal, such as bankruptcy, a debt relief order or an individual voluntary arrangement, then your liability for the debt is included in your formal arrangement, however the guarantor is still fully liable for the debt and will be expected to maintain the original repayments.
If the arrangement you enter into is informal, such as a debt management plan, then you are still liable for the debt and the loan company can continue to take action against you to recover the debt if the guarantor does not maintain the original repayments.Back to top
6) Doorstep Loans
Doorstep loans are obtained and repaid by a creditor representative calling at your home. These loans are unsecured, non-priority, usually repaid weekly and the amount of credit offered is lower than other forms of lending. This type of lending can deteriorate your financial situation as the loans interest rates are high.
Doorstep loans can be advertised or offered to you in a way that sees you ‘only’ repaying a small amount back each week to settle the loan. However, by looking at the overall repayment terms of the loan you could find yourself paying double what you originally borrowed. This type of credit should only be accessed as a last resort.
If you are paid weekly a doorstep loan can help with budgeting as the repayments are also weekly. There are usually no charges for missing an occasional repayment, but if you find you are struggling to maintain repayments you should seek debt advice or tell the lender as soon as possible. The lender may have the option of extending the repayment term and this will reduce your weekly repayments; however this will add more cost to the overall amount that you will repay.
Doorstep loan providers are not allowed to call on you uninvited; you must request them to visit you. The loan company must adhere to these rules even if you already have a loan with them. So if an agent visits to collect repayment, they cannot discuss the details of a further loan. This must be done in a separately arranged appointment.
Doorstep lenders must be authorised by the Financial Conduct Authority (FCA) and you should check this is the case before taking out a loan. If the lender cannot show proof of this, then it is likely they are a loan shark and you should not borrow from them. If you do borrow from them it is unlikely they can take you to court to recover the debt, however, they may issue threats of harm to you or your family.Back to top
7) Comparing doorstep loan providers
The website lenderscompared.org.uk is a comparison website for doorstep loans, and it can list the cheapest loans for you based on your circumstances.Back to top
8) Alternatives to high interest loans
The following alternatives may offer a cheaper option to borrowing than a payday, guarantor or payday loan:
- Credit union: Credit unions normally provide straightforward and affordable loans that are likely to be much cheaper than a high interest loan option. A credit union’s repayment options are generally more flexible
- Bank overdraft: If you don’t already have an overdraft, consider asking your bank for one as an alternative to a high interest loan. Banks usually provide a fee-free overdraft for a small amount. If you need an overdraft higher than the fee-free limit, you will be charged interest on the amount above the fee-free limit. An overdraft can be cleared and cancelled by you at any time; however it can also be cancelled by the bank at any time especially if you exceed the limit they allow
- Ask friends or family: It can be embarrassing to ask for financial assistance from friends or family however it can save a lot of interest fees, charges, stress and worry compared to borrowing with a high interest loan
9) Complaining about a high-interest lender
With a payday loan, if you withdraw your consent for a recurring payment and payment is still taken, your bank should give you a refund provided you gave them sufficient notice to withdraw your consent. If they do not do this, or refuse to cancel the recurring payment, you can use your bank’s complaints process. If you are not happy with the outcome or response from your bank, you can take your complaint to the Financial Ombudsman Service (FOS).
You should also complain to the payday loan company through their own complaints procedure. If you are not happy with the outcome or response again you can take your complaint to the Financial Ombudsman Service (FOS).
For guarantor and doorstep loans, firstly complain to the loan company through a formal complaint in writing, detailing your reasons for the complaint. If the response is not to your satisfaction then you can escalate your complaint to the Financial Ombudsman Service (FOS).
You have six months from the date of the final response from your lender to make a complaint to the FOS. Your lender should tell you when their response is final. In some occasions it may be their only response. If you are not sure, ask them. If you do not complain to the FOS within six months, they may not be able to help.Back to top
10) Useful Contacts
Financial Conduct Authority
Financial Ombudsman Service
- Download "Sample Letter - Contacting your card bank to remove your recurring continuous payment authority (CPA)"
- Download "Sample Letter - Contacting a payday loan creditor to remove your recurring continuous payment authority (CPA)"