Including Payday Loans in your Debt Management Plan
Payday loans may sound like a great idea, promising quick access to money that you can use in an emergency situation if you have no savings to spare, but the reality is that people end up paying a much larger amount back and can even find themselves in financial difficulty. This is because payday loans are created to be cleared once your next payday rolls around.
Sadly, the interest and charges many payday loan providers add to the initial loan can see people struggle to clear this debt – and so it rolls over to the next month.
If you are in this situation and struggling to make repayments for a payday loan on top of your other financial commitments, it’s important you tackle the problem before it spirals out of control.
While looking into debt solutions, you’ve perhaps heard of a debt management plan that involves paying a single, reduced monthly repayment to your creditors to clear your debts. It is an informal agreement that continues until the debts are repaid and creditors can still apply fees and charges, as well as chasing for payment while this debt solution is being carried out.
However, it’s a debt solution we recommend if you are looking for an effective way of repaying your debts. It allows you to reduce the number of monthly outgoings you have to keep track of and put a plan in place to become debt free in the future. It’s a great alternative to an insolvency solution – such as an individual voluntary arrangement (IVA) or debt relief order – if you have debts of no more than £4,500.
We have more information available about debt management plans and what to consider if you are thinking of taking one on to repay your payday loan debts.
Can you put a payday loan into a DMP?
Yes, you could put all of your unsecured debts into a debt management plan if you are looking for a way to clear these effectively. By putting a payday loan in a debt management plan, you can pay what you owe off over time, in a controlled way.
What is an unsecured debt?
An unsecured debt is a credit product that has no links to any assets you own, such as your home or vehicle. Credit cards and personal loans also count as unsecured debts and can be included in a debt management plan too.
We recommend including all of the debts that you owe in your debt management plan, this ensures you only have one monthly repayment to make and it makes the whole process more manageable – while ensuring creditors receive their payments. There are some debts that cannot be included, such as your mortgage and utility bills.
Can a payday loan company reject your debt management plan?
When you propose a debt solution, whether it’s a debt management plan, an IVA or even bankruptcy, creditors have the option to say yes or no to being paid this way. Payday loan providers do have the choice of whether they can accept you making your repayments via a debt management plan or not.
However, it’s unlikely they will reject your proposal as they understand that they will still be receiving repayments. If your reduced payment offer is fair, there should be no issues.
It’s worth noting though that because it is an informal agreement they can continue to add interest and charges, as well as chase for payment – so it may take longer to repay what you owe. However, most lenders will stop adding this interest once we have informed them of your financial difficulty. This is because most UK credit lenders are signed up to the Credit Services Association Code of Practice and the Lending Code, which encourages creditors to consider stopping or reducing their charges on what you owe. This makes a debt management plan a great option for many dealing with payday loan debts.
How do you set up a debt management plan to include a payday loan?
You will need to work with a debt management company, such as PayPlan, who will then contact your creditors to confirm that you will be repaying them via a Debt Management Plan. Put together a list of the debts you want to include – we recommend featuring all unsecured debts to ensure these are paid off.
The debt management company you choose will work with you, to determine what you can afford to pay each month after your priority debts and expenses, then propose this to creditors. Ensure you have all the information available that the company will need, this includes seeking out and compiling:
- Proof of your most current address, such as a household bill.
- A form of photo I.D like a drivers licence or passport.
- Confirmation of what you owe and to who – dig out any formal correspondence between you and your payday loan provider. This could be a payment chasing letter or a breakdown of what you owe.
- You could also find this on your credit report. We have more information about how to improve your credit rating here.
Is a debt management plan right for you?
This is a question many of our clients ask, as they seek an effective debt solution. Debt management plans are an excellent resource if you are looking to manage your repayments more effectively and ensure all creditors are paid on time but don’t want to take on a strict insolvency solution, such as an IVA or bankruptcy.
Again, our dedicated section on the site can help you weigh up the pros and cons of this debt solution to determine if it’s the right choice for you.
New rules for payday loan lenders
The interest charged by payday loans has previously been considerably over-inflated. The Financial Conduct Authority has now placed rules on payday loan lenders to cap the interest and default fees they charge.
Now, people who take on a payday loan for 30 days will not have to pay any more than £24 in fees per £100 borrowed. The cap has been put in place to ensure that people never pay back more than double what they initially took on. It is possible to still find yourself in considerable debt, although, the amount owed won’t be as much as that charged in the past.