Payday Loans, Flexi Overdraft and Wage Flow Loans Explained
Published / Last Updated on 01/03/2024
Over 10 years ago, paydays loans were extremely popular with people using the short-term loan as an alternative to an overdraft, extended overdraft or indeed an unauthorised overdraft.
They were controversial given huge interest rates, huge late repayment penalties and spiralling debt as some people in financial difficulty took additional and larger payday loans to pay off other payday loans resulting in a vicious cycle of getting ever further into debt.
Regulation and Lawsuits
The Financial Services Act 2012, 2013 and subsequent legal actions against payday lenders tightened up regulation on “high-cost short-term credit (HCSTC)”, payday loans to you and us.
- A cap on interest rates charged at 0.8% per day (that’s still a staggering 1,250% APR.
- A maximum of two rollovers of the payday loan.
With lawsuits and legal action by consumers working with the Financial Conduct Authority (FCA) and even the Church of England setting up an alternative, cheaper finance short term loan scheme, payday lenders such as Ariste Holding, CashEuroNet UK, Curo Transatlantic, Instant Cash Loans, Trusted Cash and Wonga went into liquidation. This has made the payday loan market virtually a ‘dead duck’.
Payday and Flexi Overdraft
That said, there are still payday lenders out there as well as other types of scheme such as flexible overdraft loan schemes, where you agree your additional overdraft scheme with a lender totally separate from your main bankers, a line of credit is agreed (after ensuring suitability and affordability by the lender) meaning you can dip in and out of your flexi-overdraft facility when and if you need it.
Advantages of Payday Loans
- Easy to get.
- Less credit checks.
- Small amounts of cash available quickly.
Disadvantages of Payday Loans
- Expensive with daily rate cap 0.8% per day, a staggering 1,250% APR.
- High late payment penalties.
- Short term loans only, they must be repaid quickly.
‘Wage Flow’ (Flexible Earnings)
A newer development is where some employers now offer flexible pay at work under ‘flexi-earn’ schemes where you are allowed to drawdown some of your earnings early, provided you have already done the work. For example, you work in hospitality in a seaside town, you have had a bumper 60-hour week, but you are paid weekly in arrears. Under a ‘wage flow’ scheme, you can draw some of those earnings early (e.g., the overtime you did) rather than waiting for your big pay packet next week. You still pay the same income tax and national insurance contributions (NIC), it is just that you have drawn down some of your pay early.
