An Indepth Guide to Payday Loans

Written by David Beard on May 19, 2018

Updated August 27, 2021

Payday loans all you need to know

Thousands of individuals in the UK are struggling to make their funds last until their next payday and are turning to payday or short-term loans to help bridge the gap. They offer a quick and easy solution when a cash emergency arises, giving you access to funds quickly.

In recent years, the payday loans market has changed significantly, thanks to new rules and regulations, and while many people have a basic understanding of what a payday loan is, very few fully understand the ins and outs and the risks involved.

This guide will cover the details of payday and short-term loans, what they are and how they work, to give you all the knowledge you need to decide if a payday loan is right for you and your situation.

What is a payday loan?

Short term payday loans

A payday loan or a short-term loan is usually offered by a non-bank company, such as an online lender, and they allow customers to borrow funds for a short period of time; generally until their next payday. All direct payday lenders operate in a similar fashion, and the process is the same for them all. You provide the lender with your personal and financial information and request a certain amount of cash; they use your bank account details as authorisation, and the money is deposited into your account. The interest rates are usually relatively high and will depend on how much you borrow and for how long.

Lenders will use a variety of factors to decide the amount of credit a customer can borrow, including determining their ability to make the repayments. Many payday loan providers won’t run a full credit check but will instead look at your employment and current earnings to decide if you can realistically repay the loan. The application process for a payday loan is usually very simple and straightforward, with an instant decision and funds released immediately or within 24 hours.

Payday loans can be extremely expensive, and the amount is usually between £50 loans and £1,000 loans with popular borrowing amounts being £100 and £200 loans. They generally have short durations, and APRs can be several thousand percent. Repayment terms will generally require the borrower to repay the loan amount in full on their next payday, including fees and interest.

Most payday loan companies will ask for authorisation to automatically take the repayment amount from your account, and if the payment date is missed, they will withdraw the funds themselves. Some payday loans offer structured repayment terms so that you can pay off the balance over a predetermined period of time.

Payday loan lenders will not conduct as rigorous checks as other lenders, but you need to make sure you are completely honest, and your details match the ones they check. If you make a mistake or lie, your application could be rejected.

Calculator – how much will it cost?

Use our payday loan calculator to see how much your loan will cost and the amount of interest charged over the period of the loan.

When can you use a payday loan?

Payday loans are useful for emergency or unexpected situations, where you are suddenly hit with a one-off expense that you simply cannot afford at that moment in time. Funds received from a payday loan can usually be spent in any way you want, and there are no limits on what the loan can be used for.

These types of short-term finance options are a great fall back in times of need, maybe it is that your car won’t start, or your boilers stopped working in the middle of winter; whatever you need the funds for, a payday loan could be the solution.

If you are in a position where you have little savings to rely on and not able to borrow cash from friends or family in a time of need, then a payday loan could help. However, the costs associated with a payday loan are high and can put you into a negative borrowing cycle.

You should always carefully consider all your options when deciding whether a payday loan is right for you, and always make sure you can realistically make the repayments in the predetermined time frame.

A payday loan often looks like an attractive option in a time of need, with the idea of getting your hands on a cash sum almost instantly being very tempting. Once you have got yourself a payday loan, however, you may start viewing them in a different light when the repayment date is looming, and amount borrowed has increased significantly, thanks to high-interest rates and fees.

These types of short-term loans should only ever be considered as a temporary solution and should never be relied upon; they are not intended for borrowing vast sums of money or for borrowing for an extended period of time.

It is so tempting to borrow slightly more than you need just to make the monthly budget more comfortable, but this will come at a high price. If you do need a payday loan, then only acquire the absolute minimum you need to cover the expense, and this will lessen the charges and fees when it comes to repayment.

Should you take out a payday loan?

When trying to decide if a payday loan is right for you, it is essential to correctly understand the interest and fees involved, as well as your own current situation. There are a few situations where payday loans might provide the perfect solution to your problem, and others where there are almost certainly more realistic options. Here are a few examples of when you could consider a payday loan:

1. Unexpected expenses such as home or car repairs

2. Getting caught short between paydays and needing funds for daily essentials

3. Avoiding overdraft fees and bounce charges if you have accidentally overspent

4. Other unexpected emergencies (Also see emergency loans)

On the other hand, there are some instances where a payday loan might not be the most appropriate solution. In the following situations you should consider other options instead of a payday and short-term loans:

1. You need an extended period of time to repay the amount borrowed

2. You need a significant amount of cash

3. You want the funds for something not essential, such as a holiday, new technology or buying Christmas presents

4. You are in a borrowing cycle and need to borrow funds repeatedly.

Some payday loan lenders offer a range of instalment options for repayment. Too many instalments will increase the price of the loan significantly. Too few, and you may struggle to pay the loan back in time which could result in missed payment charges. Choose the number of instalments you need very carefully.

What are the benefits of a payday loan?

Payday or short-term loans can be a great solution when you are urgently in need of some funds for an emergency or unexpected expense. These types of loans offer the following advantages:

Fast cash: If you find yourself in an unexpected situation where you need funds urgently or on the same day, a payday loan can help. Most lenders will approve applications and release some money into your bank account within minutes. Short term loans usually allow you to borrow between £50 and £1,000 quickly and easily.

Bad credit accepted: Payday loan lenders often don’t run a full credit check and will instead just look at your income and situation. Many individuals with bad credit ratings can still be accepted for a payday loan. Also see loans for CCJ’s and bad credit loans.

Simple application: Unlike with traditional loans, payday loans don’t usually require any paperwork or lengthy applications. The process is a quick online form that asks for your necessary information, for example, your incomings and outgoings. In most cases, they can be completed within minutes and are approved instantly.

Borrow small amounts:

Payday loans allow you to borrow small figures compared with other loan options, if you are in a position where you need an extra £75 to tide you over until the next payday, then this type of loan could be the perfect solution.

Easy to settle: Paying off the balance of a payday loan is a quick and easy process, once you have the funds to pay off the balance, most lenders allow you to login to an online account and settle the loan. Others may take the funds automatically from your account on a predetermined date, providing you give them permission to do this.

Always shop around for payday loan lenders, there are lots of companies in the market, and some are very competitive. Always compare payday lenders to find the cheapest as well as the one that is friendly and honest with their terms and fees.

What are the negatives?

As with any kind of borrowing, payday loans do have drawbacks that should be considered before making a final decision. The negatives of payday loans include:

High-interest rates: Different lenders will offer different prices for their payday loans, however typically the APR of a short-term or payday loan will be several thousand percent. It is worth bearing in mind that APR is designed to show the cost of borrowing for one year, and payday loans are not designed for this length of borrowing. It does, however, provide a clear indicator of how expensive payday loans are in terms of interest rates.

Substantial fees: In addition to high-interest rates, payday loans will have expensive costs associated with them as well. Some will charge fees for the initial borrowing, and there will usually be charges if payments are not made on time.

Payday loan cycle: Many individuals who use payday loans find themselves stuck in a cycle of borrowing on a regular basis. If payments are missed, and at the end of the loan term the balance isn’t settled, high fees will be charged; this can cause issues in repaying the amount plus the additional costs and results in a payday loan cycle that can be difficult to break free from.

Short-term solution: Payday loans are only suitable for very short term borrowing, usually just a couple of weeks. If you need funds for a more extended period of time, or can’t pay off the balance that quickly, a short-term loan is probably not the best solution for you.

Affect credit ratings: While some payday loan lenders won’t run a full credit check when applying for funds, that doesn’t mean the short-term loan can’t affect your credit rating in future. Even if you pay off your payday loan on time and with no issues, it will still show on your credit history and can make it difficult to obtain other credit, including mortgages, in the future. Other lenders may see you as a higher risk to lend to, as you have previously had to rely upon a payday loan to get by.

If you want to avoid payday loan borrowing, then try to set up an emergency savings account. Where possible, deposit around 5% of your income into a savings account on the same day you get paid, so you don’t notice that it’s gone. When an emergency hits, you should have some money to fall back on, which will reduce the amount you need to borrow.

What are the payday loans alternatives?

Due to the high-interest rates and additional fees, payday loans can be a very expensive option, and there are a number of alternatives that you should consider before making a final decision.

Credit cards

Even the most expensive credit card will usually have a better interest rate than a payday loan, and if you really require cash, you can take a cash advance on a credit card and still be saving money. Credit cards can be great to have in case of emergencies and will often save money compared with payday loans, and they will generally give you slightly longer to pay off the balance if you need it. For those with poor credit ratings a credit card doesn’t have to be out of the question, many lenders now offer credit cards for those with bad credit, and these are designed to help build your credit score which could help you out in the future.

Credit unions

Credit unions are community savings and loan providers; they are traditionally fairy small, non-profit organisations to help a community although in recent years they have started to become more commercial. Currently, in the UK, there are over 300 credit unions. They are often a much cheaper alternative to a payday loan as there is a cap on the amount of interest they can charge, this cap currently sits at 3% a month in England, Scotland and Wales.

Pay advances

If you need some extra funds to tide you over until your next payday it can be worth asking your employer for an advance on your wages; many employers will be understanding of your situation and do whatever they can to help. If you have just started a new job after being unemployed and not yet received your first paycheck, the Jobcentre Plus may be able to provide you with a short-term advance.

Family and friends

To avoid paying interest and getting into debt with payday loans there are alternative solutions, it can help to speak with close friends or family about borrowing cash in emergency situations. If you do choose to go down this route, be sure to discuss and decide with them a budget and repayment plan, and what the situation will be if you do repay them late. It is also essential to put this agreement into writing to avoid any disputes down the line.


Most banks will allow you to add an authorised overdraft to your current account. Occasionally these can be relatively expensive, but it will still be cheaper than using a payday loan if you keep within the overdraft limit. It is vital to avoid unauthorised overdrafts as they will come with hefty charges and fines and can be challenging to get out of.

Welfare assistance schemes

If you are looking at getting a payday loan to cover daily essentials such as food and bills you might be eligible for help from your local welfare assistance scheme. These vary depending on the area but usually provide food banks, pre-payment cards or vouchers to help you get your essential items without getting into debt.

If friends or family want to help, but do not have the funds available, then a guarantor loan might be a better option for you both. A guarantor loan means your nominated person is responsible for paying the loan back if you cannot afford to. You need to consider this option carefully as relying on your guarantor to pay back your loan could damage relationships.

What regulations apply to payday & short term loans?

Payday loans have often faced a lot of criticism from financial bodies, with many concerned that the loans have been too easy to obtain which has resulted in unethical lending. To tackle this, various legislation has come into place to protect borrowers, including a limit on the charges of payday loans. In 2014 the Financial Conduct Authority (FCA) took over regulation of the consumer credit market from the Office of Fair Trading (OFT).

The FCA imposed regulations to ensure that payday loan companies only lend to those who can afford it and to increase consumers awareness of the risks and costs involved with borrowing. Here are some of the key regulations that apply to payday loans today:

Limited rollovers

If you miss your loan repayment date most lenders will allow you to roll it over to the following month, there are high fees and charges associated with this, and a small loan can quickly become a huge debt.

The FCA has limited the number of times a payday loan can be rolled over to two, after this the balance is due and cannot be rolled over again. The idea behind this legislation is to stop payday loans spiralling out of control and leaving borrowers with unmanageable debts.

Limited CPA attempts

A CPA is a Continuous Payment Authority and is used by many lenders to collect payment from a payday loan. It gives the loan company the right to take the funds from your account, on the date they choose and for the amount they want. If the funds aren’t available in the account, it will be a failed CPA attempt.

The FCA has limited the number of attempts a lender can try to two, and after this, they will need to contact the borrower directly. This is to prevent loan companies from continuously trying to withdraw money when funds aren’t available.

No part payments by CPA

Not only are lenders limited to the number of times they can take payment using CPA, but they are also limited to the amount they can collect. Payments can only be taken via CPA if you have the funds to cover the full balance owed, part payments cannot be taken from your account.

The FCA introduced this regulation to avoid lenders from completely emptying a borrower’s bank account if they didn’t have the funds to repay the full loan amount. Part payments can often be made towards your payday loan balance, but you will need to give specific consent for this.

Risk warnings

Every payday loan company must display a specific risk warning to provide customers with a warning of the dangers of late repayments and borrowing too much. This warning is required to be shown on all online and offline communications from a payday loan company.

Debt advice

Lenders are obligated to provide their customers with information on where and how to get debt advice free of charge before they can roll over or refinance a loan. This information is not required to be given when a payday loan is first taken.

Payday loan cap

The FCA set a limit on the charges and fees associated with payday loans back in 2015. Lenders cannot charge more than 0.8% of the amount borrowed per day, and if loans aren’t paid off in time, the additional charges can’t be more than £15. With these regulations, if a borrower takes out a £100 loan for 30 days and pays it all back in time, they cannot be charged more than £24.

Since the FCA introduced these regulations, there has been an 8% fall in default rates, a £40 drop in average loan charges and a 20% drop in approved loan applications.

You can make sure your chosen lender acts responsibly and followers rules set by the FCA by checking their website for their FCA registration number. Alternatively, you can check if the FCA authorises the provider by using the FCA’s search register.

Can you trust payday lenders?

Many individuals are concerned about the safety of payday lenders, and a few years ago there was a good reason not to trust some of the payday lenders around. Five years ago, it was not uncommon to hear negative stories of payday loans, with many reporting that lenders were accepting applications too easily, and lending to individuals who could not pay the funds back.

Many consumers found themselves stuck in a spiral of debt that was extremely difficult to get out of, resulting in payday loan lenders having a poor reputation.

Now payday loans are heavily regulated and managed by the FCA, making them extremely safe for borrowers. During the FCAs takeover of the regulations of short-term loans, they carried out a thorough review and assessment of all payday loan lenders, and many were not given a licence to continue trading in the industry.

The FCA authorises all lenders that are available today and listed on the Financial Services Register. If you are considering a payday loan lender, crosscheck the company with the information on the Financial Service Register to double check that they are a lender that can be trusted.

The new legislation that has been put in place on payday loans means that borrowers can trust that the price caps and limitations on interest rates are protecting them from being overcharged by lenders. If you do have any financial complaints against a payday loan lender, the Financial Ombudsman will handle these and investigate any issues that should arise. This offers further protection should you be unhappy with the service received from a lender.

With regulations in place, you have a level of security and protection with a payday loan lender. You do not have this luxury with a loan shark who operates with underhand and frightening methods. Avoid loan sharks at all cost and always check your payday lender is regulated by the FCA.

Will payday loans affect credit ratings?

Your credit rating or credit score is what lenders will use to determine how likely you are to meet financial commitments and pay off a loan. Credit ratings are based on experience, and not always as simple as ‘good’ and ‘bad’; those who have never taken any kind of credit could have a bad score because there is no evidence to determine their ability to repay funds.

Payday loans will make an impact on your credit rating, and this could be either positive or negative depending on how you use them. If you take a payday loan and pay it all back in time it could improve your credit rating; however, if you miss repayments or deadlines, your credit rating will drop.

Every payday loan you take will appear on a credit check, and some lenders might consider the use of these types of loans as a sign you are struggling financially. The process of applying for a payday loan will also leave a mark on your credit report, even if you then decide not to take the loan after all.

It is wise to keep an eye on your credit score and make sure you fix any mistakes as quickly as possible. By checking your credit score and doing all you can to improve it, it could help you when you next need financial assistance.

Finding the best payday loan providers

When it comes to choosing which lender to use for a payday loan, it can be overwhelming with the number of different options available. Start by determining exactly how much you need to borrow and when you can realistically pay it all off by; you can then start finding the cheapest and most suitable option for you.

The charges involved will vary between lenders and are dependent on the size and length of the loan. There are loads of loan comparison websites out there that can be used to quickly and easily see the interest rates and other terms of various providers all in one place.

Currently, the cheapest option for a payday loan of £100 for a one-month duration is Track Loans who are offering a cost of credit of £9.62 and an APR of 201%. Following from this is Dot Dot Loans with a cost of credit of £14.12 and 976.5% APR, and then Sunny charging £15.30 and 475% APR. Each of these providers has their own criteria for being approved and their own terms and conditions that should be carefully considered before deciding to take out a payday loan.

For peace of mind when choosing a lender, you can find reviews for a range of different payday loan lenders here on Lending Expert.

I’ve taken out a payday loan. What next?

Once you have considered all your options and decided to take out a payday loan, it is vital to know your next steps. Carefully managing your payday loan will be beneficial in making sure you pay off the balance by the deadline and avoid further debt.

Most online payday loan providers offer the ability to manage your loan online, allowing you to check the balance, make payments and even borrow more if you need to. Your online account will allow you to check the progress of your loan, see when your next payment date is, check what the remaining balance of your loan is and make overpayments to clear your loan quicker.

If your lender doesn’t provide an online service, you can call them to take any of these actions or check your loan balance on the statements they will send to you.

If you change your mind about your loan after taking it out, you have a 14 day cooling off period where you can choose to cancel the loan early. You will need to pay off the loan amount and any interest to be able to cancel your loan. Most payday loan providers will allow you to pay off your loan without additional charges at any time, and only require you to pay the interest for the time you have had the loan.

There are a few options for paying off your payday loan:

Monthly repayments: Paying off your balance monthly will clear your loan by the agreed end date, providing you keep up with the repayments.

Early repayment: If you have the funds available to pay off your loan balance earlier than agreed, most lenders will allow you to pay the remaining loan amount by card at any time.

Borrow: If you have a lower interest alternative, such as an account with a 0% overdraft, you can use this to pay off your loan and save on interest. It is essential to remember that you will still need to pay the balance depending on the terms of the alternative borrowing method used.

If you are struggling to make your repayments and worried about missing your loan deadline, then call your lender immediately. Discuss your financial difficulties with them, and they will try to help by arranging a repayment plan that works for both of you. If you don’t contact them and let them know you are struggling, missed payments will incur additional charges and leave a mark on your credit score.

How to manage debt?

Finding yourself in a situation where you owe money that you simply can’t afford to pay back can be scary and stressful, and it is essential to properly manage your debts to avoid them spiralling out of control. Here are simple steps you can take to ensure you are entirely in control of your debts:

List your debts

It is essential to be aware of exactly who you owe money to and how much you owe. Write a list of all your current debts that includes the total amount of debt and due dates. Keep your list up to date and refer to it regularly so as you are always aware of your overall debt and can properly manage it.

Pay on time

When in debt your top priority should always be to pay your loan payments on time, missed payments will result in further charges and fees which will ultimately make your payday loan even harder to pay off.

Keep a note of all your repayment dates in your diary and set yourself reminders a few days before the payment date. If you do forget a payment date and miss a payment, don’t want until the next payment date, make the payment as soon as possible.

Make the minimum payments

If you are struggling to pay the full amount of your loan make sure you at least pay the minimum monthly payments, it won’t help reduce your debts but will prevent you from getting into further debt.

Ask for help

Getting yourself out of debt and repaying loans can be difficult, and there are ways to get help. There is a range of agencies and charities that specialise in helping those struggling with their finances.

A professional debt advisor can help to provide tips for simple changes in your life which can help make managing debts easier. Do not suffer alone, always try to speak to someone, such as a debt charity, and see if they can help you.

Where can I seek debt advice?

There are a lot of free debt advice services in the UK that you can turn to if you are struggling to pay off your debts and loans, they specialise in helping borrowers find a repayment solution that works for them.

Debt advisors are professionally trained, they will never judge or make you feel guilty about your current situation, and they will help with whatever debt situation you are in, whether it is big or small. Seeking debt advice can not only give you information on repaying your loans but also help you to feel less stressed and more in control of your situation.

Online debt advice services such as National Debtline, Debt Advice Foundation and StepChange Debt Charity are secure online services that offer immediate and personalised debt help. A few of these services are available to contact 24 hours a day, and they are an easy and simple solution to getting free debt advice.

A lot of online debt advice providers are also available over the phone if you would prefer to speak with someone about your worries. There are also some services across the country that offer face to face advice, where you can set up an appointment to meet with an advisor at a time that suits you. You can search online for debt advice services that are local to you.

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