Payday loans

Payday loans are an expensive way to borrow and best avoided. 

Never take out a payday loan unless you’re 100% certain you can repay it on time and in full - otherwise the costs can soon spiral out of control. 

If you have already taken out a payday loan and are struggling to pay it back, see our page on dealing with debt. You can also read the Payday loan survival guide.

How payday loans work

Payday loans are short-term loans designed to tide people over until payday. The money is paid directly into your bank account, and you repay in full with interest and charges - at the end of the month.

stop and think!

Just because a payday lender is prepared to lend you money doesn't mean you can really afford to borrow it.

Increasingly though, you can borrow for longer periods - typically three months (but longer loans are available) and repay by instalments. What all these loans have in common is that they are high cost and short-term, and often for small amounts. 

Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period.

On the repayment date, the lender takes the full amount you owe plus interest directly from your bank account. This happens even if you need the money to pay essential bills like mortgage or rent, heating and food.

A payday loan is expensive and could make your situation worse if you can't afford to pay it back on time. It may also affect your ability to get credit in the future. You need to think carefully before choosing one.

What payday loans cost you

The cost of payday loans has been capped by law, under rules made by the Financial Conduct Authority (FCA).

The rules limit the amount of interest and default fees you can be charged.

Someone taking out a loan for 30 days will pay no more than £24 in fees and charges per £100 borrowed, and if you don’t repay on time, the most you can be charged in default fees is £15 plus interest on the amount you borrowed.

An overall cap means that you will never pay back more than twice what you initially borrowed.  

See our video of how Micky got caught up with payday loans and how they ruined his military career. You can also use the payday loan interest calculator on the BBC website to see how much a payday loan costs.

did you know?

Over a year, the average annual percentage interest rate of charge (APR) could be up to 1,500% compared to 22.8% for a typical credit card.

Recurring payments

Before agreeing to a loan, many payday lenders will ask you to set up a recurring payment (also known as a continuous payment authority). This lets them take what you owe directly from your account via your debit card on the repayment date. This can be convenient, but it is risky. It might not leave you enough money in your account for other bill payments, such as mortgage or rent or other essential spending such as heating or food. And it could take you over your overdraft limit, leading to bank charges.

Stopping a recurring payment – you can cancel by contacting your bank and telling them that you have stopped permission for the recurring payment. Your bank must then stop the recurring payment. If your bank allows payments to be taken after you’ve stopped your permission, it must refund the money to you along with any related charges.

Use this letter on the National Debtline website to ask your bank to cancel a continuous payment authority.

Make sure that you tell the lender you’ve cancelled the recurring payment because of difficulties paying back the money. You will still owe the debt and the lender can go on charging interest and other fees so it’s essential you get free debt advice to help you deal with the loan - see below.

Avoiding the payday loans trap

If you have problems repaying a payday loan, the payday lender may tempt you with an extension known as a deferral or rollover, or even a further loan. However, they are limited in how many times they can roll over a loan, and must give you an information sheet each time with details of free debt advice providers. 

Rolling over your payday loan might seem like a great solution at the time. But it can quickly lead to problems, because you’ll have to pay back much more in interest and other fees. This could leave you struggling to pay for the essentials you need, such as rent, mortgage, food and heating.

If you’ve got problems repaying a payday loan, there’s plenty of help available so don’t struggle alone - see Where to get help if you are in debt.

Look for a better alternative

Don’t assume that you can’t get a more suitable loan elsewhere – even if you have a poor credit rating - see Alternatives to expensive loans  or try this tool on the Money Advice Service's website. 

Don’t be swayed by payday lenders’ advertising

Payday lenders advertise their loans for every cash flow crisis you can think of. But a payday loan is likely to be the wrong choice for you if:

  • You want to use it to pay off other loans
  • You already have one or more payday loans
  • You aren’t 100% certain you’ll be able to pay it back on time
  • You want it to pay for things you don't need that you can't afford – such as nights out, new clothes or concert tickets

If you’re struggling to repay loans, credit cards and other bills, you can get free, confidential advice from a debt advice service. The adviser will help you get your finances back on track and can negotiate with the people you owe money to. This will help get you the time you need to repay your debts so you don’t have to resort to more borrowing. See Where to get help if you are in debt.

If you’re about to get a payday loan

Before taking out a payday loan, think carefully about how you’re going to pay it back. If you’re short of money this month, what makes you think you’ll have the money plus interest next month? Are you expecting extra income? Or are you going to cut back considerably on spending?

Consider whether a loan that you repay in instalments might be better for you.

If you decide to get a payday loan check that the lender is regulated by the Financial Conduct Authority (FCA) – they should tell you this on their website or in store. All payday lenders must be regulated by the FCA.

The 14 day cooling-off period

If you change your mind, you can withdraw from the agreement at any time within the first 14 days. All you need to pay is the interest on the credit you have used. Any additional charges must be refunded to you.

Find out more about how payday loans work on the National Debtline website.  

Last reviewed: 11/12/2017