I'm struggling to repay my payday loan, what can I do?

Summary: This article discusses the options available to those struggling to repay their payday loan, including some of the more common debt solutions available.

Pay day loans are a short term loan aimed to tide individuals over until payday. However, they often have high charges and interest associated, especially if they are not repaid within the agreed time. They tend to be popular with those with a poor credit rating as they are very easy to obtain. However, these individuals are also those that could be more likely to default on the loan, and ultimately struggle to repay the debt.

First step - budgeting

The first thing anyone in debt should do is to review all monthly income and outgoings and cut back on non essential expenses such as expensive television packages and/or social events. Set a weekly food allowance and stick to it. This could free up enough income to repay the debt in a reasonable time. It is also worth contacting the lender as they may be prepared to freeze the interest for a period of time.

Second step - debt solutions

If, even after budgeting, income does not cover essential expenditure and debt repayments, it may be that the debtor is insolvent. In this instance, there are several possible options:

•Individual Voluntary Arrangement (IVA). An IVA is aimed at those with more than around £10,000-£12,000 of unsecured debt, which would include pay day loans, credit cards, overdrafts etc. Provided that certain criteria are met and the creditors agree, interest is frozen and the individual repays the debt by paying an affordable monk amount, usually for a period of 5 years, after which time, any outstanding debt is usually cleared. The advantage of an IVA is that homeowners will not usually be forced into selling their home.

• Debt Relief Order (DRO). DROs are aimed at those on lower incomes with less than £50 per month left after all essential expenditure, and with up to £15,000 of unsecured debt. If granted, the DRO will last for usually 12 months, during which time, repayments to the creditors are frozen. After the 12 months, the debt will usually be cleared. While it sounds like an ideal solution, there are strict criteria for acceptance. The applicant cannot own their own home for example, nor can they own a car worth more than about £1000.

• Bankruptcy. Bankruptcy is often the last resort for many, due to the possible impact on homeowners. It is available to anyone with more than £750 of unsecured debt and who is resident in the UK. There are fees associated to bankruptcy which is in the region of £725. Bankruptcy restrictions usually last from between 12 months and 3 years, with any outstanding debt being cleared at the end.

It is important to note that with all of the above options, there will be a substantial impact to the individual’s credit rating, which could affect obtaining future credit and/or a mortgage.