Beware hidden fees: Understanding payday loan agreements

If you need to borrow money quickly, a popular option that offers same-day cash is payday loans. Having evolved over the years thanks to more regulation from the Financial Conduct Authority (FCA) to protect borrowers and ensure responsible lending practices are followed, these short-term options can be affordable in the right circumstances. However, as not all lenders are equal, some may charge fees that are hidden within the agreement.

When considering payday loans as a suitable option to cover unexpected expenses, you’ll want to ensure you understand what fees are charged and not have any hidden surprises. It’s better to be fully informed about the agreement before signing than later on. To help, below we’ll explain what kinds of hidden fees to watch out for and how to under the agreement more clearly. 

Understanding the fees associated with payday loans

Like any loan, there will be additions to consider on top of the amount you want to borrow. Along with the interest charge, some lenders will charge fees for various things, however not all lenders will do so. This is why it’s important to compare your options so that you have a good idea of what fees to expect. If you are using an FCA-approved lender, this should all be transparent and easy to see so that you don’t need to look too hard to find them.

The FCA introduced a price cap back in 2015 that protects borrowers from having excessive charges, this includes:

0.8% per day – the interest and fees charged must not exceed 0.8% per day of the amount borrowed.
£15 default fees – if for any reason a borrower defaults on a loan, the fees must not exceed £15.
100% of the amount borrowed – a total cost cap to ensure borrowers will never have to pay more than 100% of the amount borrowed in fees and interest. 

The types of fees that you may see on an agreement will vary, but these can include the following:

Admin/Processing fees – covering the administrative cost of the loan.
Broker fees – if using a broker service to find a loan, you may see this charge.
Late payment fee – the amount charged if you missed a scheduled repayment.
Early repayment fee – charged if repaying the loan sooner than the original loan term.
Loan rollover fees – if you extend the repayment term due to struggling with repayments.

As mentioned, this will vary between short-term lenders, and some may not be clear unless you read the terms and conditions fully. Each of these fees can quickly accumulate if you get into problems with repayment alongside the interest charge. Be aware of lenders that ask for a fee upfront before offering you a loan too – this could be a scam, so check if the lender is FCA registered first.

Tips for reading and understanding loan agreements

When reviewing your credit agreement, it’s crucial to read every detail carefully. It can be all too easy to skip this when you need money quickly, but you want to ensure you’re making an informed decision rather than a rushed one.

Pay special attention to the interest rate, all fees including any hidden charges, and the repayment terms. Some lenders won’t charge any hidden fees, making these clear from the outset so it is easier for you to understand before signing. Don’t hesitate to ask the lender for clarification on any unclear terms.

Understanding your agreement can protect you from unexpected costs and ensure that you are fully informed about the obligations you are committing to. You have a 14-day cooling-off period in case you change your mind on the loan too.

Being aware of hidden fees is the first step to making a more informed decision. The last thing you want is to take out a loan you’ve not fully understood. Always consider alternative solutions where you can such as the help of friends and family and use emergency savings if you have them. If you can avoid being reliant on credit, this can protect your long-term finances.

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The article Beware hidden fees: Understanding payday loan agreements first appeared in TravelDailyNews International.

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