What payday loans are in the UK and how they work

In the UK, payday loans are a form of high-cost, short-term credit designed to cover urgent expenses until the next payday. Typical loan sizes range from around £100 to £1,000, with repayment often due within 30 days or spread across a few monthly instalments. While once known for one-off, same-day borrowing, many lenders now offer short-term instalment options under the same regulatory umbrella. The appeal is speed and simplicity: applications can be completed online, decisions can arrive in minutes, and funds may be sent the same day.

These loans are tightly regulated. The Financial Conduct Authority (FCA) caps the price of high-cost short-term credit in three crucial ways: interest and fees must not exceed 0.8% per day of the amount borrowed; default fees are capped at £15; and the total cost of credit cannot exceed 100% of the amount borrowed (so no one should repay more than double the original sum, including interest and fees). Lenders must run affordability checks to assess income, essential spending, and existing debts. A credit check is almost always carried out, and the loan typically appears on the borrower’s credit file.

The application process usually requires proof of identity, income, and a UK bank account. Repayments are commonly collected via a Continuous Payment Authority (CPA), authorising the lender to take payment from the borrower’s account on the due date. CPAs are also regulated: repeated collection attempts are restricted and must be fair. Borrowers interested in comparing options often search for payday loans uk to understand costs and features across different providers, but the headline speed should never overshadow the importance of total cost and the borrower’s ability to repay on time without hardship.

When used appropriately—such as to cover a one-off emergency with a clear, near-term repayment plan—payday borrowing can be a short bridge. Used in the wrong circumstances, however, it can become expensive quickly. Knowing how fees are calculated, how repayment is structured, and what rights apply helps ensure any decision is made with eyes wide open.

The real cost, key risks, and practical alternatives to consider

Even with protections, short-term borrowing is costly. APRs on small, brief loans can look astronomical because APR annualises interest over a year; for a 30-day loan, the total amount payable is the key number. Under the FCA cap, interest and fees cannot exceed 0.8% per day. That means borrowing £250 for 30 days could legally cost up to about £60 before any default charges. Defaulting adds a capped fee of £15 and additional daily interest until repayment (subject to the total cost cap). The price cap prevents extreme outcomes, but it does not make payday borrowing cheap.

Risks arise when someone borrows without a realistic repayment plan. Missing payments can harm a credit score, complicate future borrowing, and increase costs through added interest (again, within the cap). Taking multiple concurrent loans to juggle bills magnifies the danger of a debt spiral. While lenders must assess affordability, only the borrower sees the full picture of upcoming expenses and volatile income. Rollovers and refinancing are restricted, and CPA collection attempts are limited, but they do not eliminate the underlying risk of borrowing more than is manageable.

Alternatives may offer better value. A credit union loan often carries far lower cost than HCSTC; many charge interest at 1%–3% per month (on a reducing balance), which is markedly cheaper than a payday loan. An arranged overdraft can be less expensive depending on the bank’s pricing, though unarranged overdrafts can be costly. Some employers provide salary advances or hardship funds. For recurring shortfalls, a small, longer-duration instalment loan or a budgeting loan (for eligible benefits claimants) may be more sustainable. Free, confidential help from charities like Citizens Advice, StepChange, or National Debtline can help restructure debts and explore options such as the Breathing Space scheme for temporary relief.

Suitability depends on context. Using payday credit for a one-off, urgent repair with a guaranteed near-term payoff can be rational. Using it to cover rent, utilities, or frequent gaps in income suggests a structural budget issue that borrowing may worsen. Before applying, review monthly cash flow, prioritise essential bills, and forecast the exact date and amount of repayment. If the plan depends on optimistic assumptions—like overtime that might not arrive—pause and consider alternatives.

Real-world scenarios, eligibility checks, and a smart borrowing checklist

Eligibility usually requires being 18 or over, a UK resident, regular income, and a UK bank account. Lenders consider income stability, essential spending, existing credit commitments, and credit history through an affordability assessment. Some accept poor credit, but the cost remains high and limits apply. Many lenders offer “soft search” tools for an initial indication without leaving a hard footprint; once the application proceeds, a full credit check typically follows. Borrowers have a statutory right to receive Pre-Contract Credit Information, making it easier to compare offers on a like-for-like basis.

Consider a quick case study. Amira’s boiler fails in January. She borrows £200 and plans to repay when her salary lands in 30 days. Under the cap, her interest and fees could be up to around £48 over that month, so she expects to repay about £248. She sets a calendar reminder, checks her balance the day before the due date, and repays on time. The outcome: costly but contained, with minimal long-term harm. Now imagine a missed payment. Ravi borrows £300 for car repairs, but overtime is cancelled, and he falls short on the due date. A capped £15 default fee is added and daily interest accrues. By contacting the lender early, Ravi arranges an affordable plan that pauses CPA attempts. His credit file records the late payment, and the cost rises, but proactive communication prevents escalation.

Compare those outcomes to Josh, who needs £200 for work tools. He joins a local credit union and borrows £200 over three months at 3% per month on the reducing balance, paying roughly £18 in interest overall—far cheaper than a payday loan. The trade-off is slower approval and less immediate convenience, but the savings are notable. These examples underscore the importance of matching the tool to the task: urgent speed versus overall cost, and future flexibility versus immediate relief.

A smart approach follows a few principles. First, borrow the smallest amount that truly solves the problem, keeping the repayment within a realistic budget. Second, focus on the total amount repayable and the exact due date; diarise it and keep a buffer in the account to avoid accidental defaults. Third, avoid multiple applications at once, because a cluster of hard searches can signal risk and reduce approval odds. Fourth, verify the lender is authorised by the FCA and read the Standard European Consumer Credit Information (SECCI) to understand rates, fees, and rights. Fifth, if repayment looks doubtful, contact the lender immediately; many will offer a revised plan to prevent further charges. Remember the statutory right to withdraw within 14 days of signing most regulated credit agreements—if exercised, only the principal plus daily interest for the days borrowed must be repaid.

For persistent money pressure, step back and rework the budget. Prioritise rent, council tax, utilities, and food. Seek support if debts are mounting; free advisers can help negotiate with creditors, identify benefits or grants, and propose sustainable plans. Used carefully, payday loans can bridge a gap. Used casually, they convert today’s emergency into next month’s shortfall. The difference lies in clear arithmetic, honest affordability checks, and disciplined follow-through.

Rania Ayoub

Alexandria marine biologist now freelancing from Reykjavík’s geothermal cafés. Rania dives into krill genomics, Icelandic sagas, and mindful digital-detox routines. She crafts sea-glass jewelry and brews hibiscus tea in volcanic steam.