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Payday loans

Short term credit loans

All you need to know about payday loans

By Mehdi Punjwani

Published: 18 July 2019

Man looking at laptop, serious expression

We compare loans that can be paid back over terms of between 1 and 25 years. The APR interest rate you’ll be charged depends on your personal circumstances, and will be between 3.2% and 99.9%

This is a representative example of what it may cost: a Loan of £7,500 over 60 months at 3.3% APR would equate to monthly repayments of £135.60. The total cost of the loan that you pay back would be £8,136.22

What is a payday loan?

A payday loan is a type of short term loan designed to help tide you over until payday when you’re short of money. They can appear to be useful, and over the past few years they’ve become more common.

But they can be dangerous if you can’t pay off the full amount plus interest and any extra charges when payday comes around.

How do payday loans work?

Payday loans are similar to other types of loans in the sense that you apply for the loan, and if you’re accepted you get the money and pay it back over an agreed period. This is usually with interest and often with other charges and fees alongside it.

They differ because payday loans are generally short term and high cost. This means the interest rate is generally very high and you’ll usually be required to pay back the loan at the end of the same month.

Applying for a payday loan

To qualify for a payday loan, you have to be over 18, with a regular income and a full bank account. In most cases you’ll also have to pass a credit check – lenders will look at your credit history to decide if they’ll lend you the money.

If you qualify, you can usually phone or email the payday loan provider to get the process started.

Getting a payday loan

If you’re successful in applying for the payday loan, you’ll usually make a deal to borrow a specific amount of money for an agreed period of time – similar to a standard loan.

However, in this case it will be:

  • a small amount on money: normally up to £1,000
  • over a short time period: generally up to two or three weeks

Paying back a payday loan

When it comes to paying back your payday loan, this is often done automatically. Your lender will take the amount you owe – the loan itself, plus interest and any charges – directly from your bank account.

This process is called Continuous Payment Authority (CPA). It can sometimes also happen to anyone else who’s previously repaid a payday loan for you, such as a family member or close friend.

It’s up to you to make sure you have the money in your account. If you don’t, the lender may continue to take payments from you until the debt is cleared.

This is also likely to bring about a late fee, which your lender may charge immediately if they can’t collect on the agreed date. The interest you have to pay will build up the longer you don’t pay.

What happens if I can’t pay back my payday loan?

If you think you won’t be able to repay the loan in time, it’s worth asking your lender if you can work out a repayment plan. You should also consider contacting a free and independent debt charity for advice, such as:

Cancelling your payday loan

Payday loans generally have cooling off periods of around 14 days, where you can change your mind and cancel the loan. You’ll still have to pay interest on money you’ve already spent, but you’ll be refunded any other fees or charges you’ve paid.

Cancelling your payday loan repayment

If you have money in your bank account but it’s needed for things like rent or bills, you can stop the payments from going automatically to your lender. Continuous payment authorities can be cancelled by contacting your bank, and so can standing orders, direct debits, and post-dated cheques.

However, you should remember that this needs to be done as early as possible, usually a few days, or your bank may not be able to stop the payment from going through.

How much do payday loans cost?

Payday loans can be expensive, especially if you aren’t able to pay the amount you owe back in full when you’re supposed to. However, the way payday lenders charge you for a loan is different to other loans – they generally charge a fee for the loan, rather than an interest rate.

If you were to calculate the equivalent APR for the fees and charges attached to payday loans, it would often reach over 1000%.

However, this serves more as a warning about how expensive these loans are, as the APR only applies if the loan was over a whole year. In many cases, even a small charge or fee on a short term loan can equate to a high APR.

There is a cap on how much payday loans can cost, put in place by the Financial Conduct Authority (FCA). This means that for each 30-day loan you’ll be charged a maximum of £24 in fees per every £100 you borrow.

There is also a cap that sets the maximum amount you’re able to pay in fees for late payments at £15 plus interest on what you borrowed.

Payday loans: pros and cons

If you’re considering a payday loan, you should be aware of the pros and cons:


  • Easier to qualify: it’s generally easier to be accepted for a payday loan as they have less stringent credit checks
  • Quick process: the application process is generally straightforward, so you’ll be able to access the money quickly
  • Borrow handy amounts: you’ll be able to borrow small amounts of money, normally up to £1,000, which can be useful for emergencies


  • High equivalent interest rates: while they might be convenient, payday loans are generally expensive and should only be seen as a last resort
  • Late fees: lenders often immediately charge late fees if you don’t have enough money to pay the debt off by the repayment date
  • Possible debt spiral: if you don’t pay your debt off as soon as possible you may find yourself having to take out another loan to cover the payments. This can quickly lead to a debt spiral and is likely to harm your credit score, making it harder to get a loan in the future
  • Short term only: these loans aren’t suitable for long term financial goals, so if this is what you had in mind you may be better off with a kind of personal loan

Alternatives to payday loans

Payday loans should be your absolute final resort due to their high prices and likelihood of further debt. Before you take out a payday loan, you should consider the following:

Credit cards

The interest rate on credit cards is low compared to payday loans, and if you make your payments on time then there’s no interest at all. However, this only applies to general spending, and using your credit card in other ways may result in charges and fees.

If you have bad or no credit, you may still qualify for some cards that are designed to help people restore their credit rating. You should be careful about how you use them as these can also come with high interest rates.

Authorised overdraft

You could also try asking your bank account provider for an authorised overdraft. You’re still often charged interest on the amount you’re overdrawn by, but it’s generally cheaper than taking out a payday loan.

You can even get interest-free overdrafts that won’t charge you at all, essentially working like an interest-free loan. However, you should confirm that the overdraft is authorised as going into an unauthorised overdraft can bring expensive fees and high interest rates.

Family and friends

Aside from financial institutions and organisations, you may want to consider borrowing from a friend or member of your family. It can help you avoid payday loans, but there are still some important things you should consider:

  • Putting the loan agreement down in writing, to make sure all parties involved know exactly what the deal involves
  • Make a repayment plan, to make sure you get a fair deal without causing any upsets
  • Plan for late or missing payments, so you can resolve any issues if they come up as family and friends should always be more important than money

What does the 2018 budget mean for payday loans?

In the 2018 budget, Phillip Hammond announced a plan for a no-interest loan scheme as an alternative to payday loans for around three million Britons. A study is set to begin in 2019 to explore the possibilities, and government officials likened the idea to a similar set up in Australia.

The plan taking place down under is said to have helped four in five people stay away from payday loans.


Other useful guides

Short term bad credit loans

Guide to emergency loans

Quick payout loans guide

Compare deals with MoneySuperMarket

Payday loans are best avoided if you can, so we don’t offer them on MoneySuperMarket – but you can find a range of secured and unsecured loans suited to your needs.

All you need to do is tell us a bit about why you need the loan, as well as how much you need and over how long, and we’ll give you a list of loans tailored precisely to your requirements.

You’ll be able to see the APR, the overall cost of the loan per month, and any fees and charges attached. You’ll also see how eligible you are for the loan, so you can find one right for you without risking too much damage to your credit score.

 Once you’ve picked the most suitable loan offer, just click through to finalise the deal with the provider.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.