Before reading further
If you are considering a payday loan because you are struggling with bills or existing debts, please consider speaking to a free debt advice service first. They can help you explore all options:
- StepChange — 0800 138 1111 — stepchange.org
- National Debtline — 0808 808 4000 — nationaldebtline.org
- MoneyHelper — 0800 138 7777 — moneyhelper.org.uk
Payday loans are a form of high-cost borrowing. They can make existing money problems significantly worse if repayments cannot be met.
What is a payday loan?
A payday loan is a short-term loan, typically for a small amount (usually £100 to £1,000), intended to be repaid on or shortly after your next payday. They are classified by the FCA as high-cost short-term credit (HCSTC).
Payday loans are sometimes also offered as instalment loans repaid over a few months. The fundamental features are the same: high interest rates and short repayment windows.
How they work
You borrow a fixed amount and agree to repay it — plus interest and fees — on a set date, usually within 30 days. The lender typically requires access to your bank account via a Continuous Payment Authority (CPA), which allows them to attempt to take payment on the agreed date.
The FCA introduced a price cap on HCSTC in 2015. Under the current rules:
- Interest and fees cannot exceed 0.8% per day of the amount borrowed
- You can never owe more in fees and interest than the original loan amount
- Default fees are capped at £15
Despite these caps, the representative APR on payday loans is typically in the range of 1,000% to 1,500%. This reflects the short duration of the loan, not just the rate charged.
The risks
Missing a repayment
If you cannot repay on the agreed date, the lender may attempt multiple payment requests through the CPA. This can cause your bank to decline other essential payments such as rent or utilities. Default charges apply, and the debt grows quickly.
Repeat borrowing
Many people who take out a payday loan find they cannot repay in full and take out a new loan to cover the previous one. This cycle can be difficult to break and leaves people worse off over time.
Impact on credit
Payday loans can appear on your credit file. Some mainstream lenders view a history of payday loan use negatively, even if the loans were repaid on time.
Bank account access
The CPA gives the lender a continuous right to take payment. If your bank balance changes before the repayment date, the lender may still attempt to collect what is owed.
Alternatives to consider first
Before taking out a payday loan, consider whether any of these alternatives would work for your situation:
- Credit union loan — many credit unions offer small, short-term loans at much lower rates than payday lenders
- Overdraft — your bank’s authorised overdraft may be cheaper for a very short-term shortfall; check the fees
- Employer advance — some employers will advance part of your salary in an emergency
- Local authority or charity support — some councils and local charities can provide emergency grants or no-interest loans
- Benefit advances — if you receive Universal Credit, you may be able to request an advance
- Budgeting Loan — available to some people who have been on certain benefits for at least 6 months; repaid through future payments at no interest
- Family or friend loan — borrowing from someone you trust, with a clear repayment plan, carries no interest
If you do take out a payday loan
- Only borrow what you are certain you can repay on the agreed date
- Read the full terms carefully before signing, including what happens if you miss payment
- Check the lender is FCA-authorised at register.fca.org.uk
- Set a reminder for the repayment date
- Do not take out a new loan to repay an existing one
If you are struggling with a payday loan debt
If you have a payday loan you cannot repay:
- Contact the lender and explain your situation — they are required by FCA rules to treat you fairly and consider a repayment plan
- Contact a free debt advice service — they can negotiate on your behalf and help you find a way forward
- If a lender is not treating you fairly, you can complain to the Financial Ombudsman Service at financial-ombudsman.org.uk
Free help
- StepChange — 0800 138 1111 — stepchange.org
- National Debtline — 0808 808 4000 — nationaldebtline.org
- MoneyHelper — 0800 138 7777 — moneyhelper.org.uk
- Citizens Advice — citizensadvice.org.uk
- Financial Ombudsman Service — financial-ombudsman.org.uk (for complaints)