Back to basics: Payday loans

Payday loans are high cost, short-term loans aimed at people who are struggling to make ends meet until their next payday.

They are big business in the UK, with over £2.8 billion of these kind of loans issued each year. However, although payday loans promise cash quickly, often within a few hours, if you fail to repay what you owe on time, debts can soon spiral out of control.

We take a closer look at how these deals work, and explain more about the greater protection for consumers following a clampdown by regulators.

How do payday loans work?

You can usually borrow between £100 and £300 with a payday loan, although some lenders allow you to borrow as much as £1,000.

According to analysis by the Competition Commission, the average payday loan is £260, but a quarter of loans are for £100 or less.

Loans typically last for 31 days, and annual percentage rates (APRs) charged can be as high as 5,000%. As a result, a payday loan can cost as much as £25 for every £100 borrowed. Lenders argue that rates are set at this level as payday loans are usually repaid within a short period of time.

How do you repay a payday loan?

When you apply for a payday loan, you will often be asked for your debit or credit card details, so that the lender can set up something called a ‘continuous payment authority’.

This basically means the lender can take money from your card at any time, and they can also change the size of the payment without warning.  However, the city regulator the Financial Conduct Authority (FCA) which began regulating the payday loans industry on April 1 this year, introduced new rules on the same date to restrict the amount of the times a lender can take money from a borrower’s account without their specific permission to two. Lenders must also, wherever possible, only take full repayments.

You can cancel an existing continuous payment authority by contacting the company and asking it to stop. You can also cancel directly with your card issuer, although you should also inform the company too. Remember that even if you cancel the continuous payment authority, you will have to pay off what you owe another way.

What happens if you don’t pay off your loan by the agreed date?

According to the FCA, over a third of all payday loans are repaid late, or not at all. If you can’t repay what you owe, the amount you’ve borrowed can soar due to the hefty interest rates charged.  Loans are often rolled over, so even though a loan might be advertised as lasting for a month, they can last much longer.  However, again, since April 1, lenders have to limit the number of rollovers to two, so that loans can’t last indefinitely.

Are there certain rules payday lenders have to abide by?

Yes, there are. As part of the FCA regulations, payday lenders must make sure that their customers can afford the loans they take out. Previously, it was pretty easy for just about anyone to take out a payday loan, but now payday lenders have to conduct proper credit and income checks to ensure that borrowers can repay what they owe.

Lenders must also let their customers know where they can get free debt advice if their loans are being rolled over or refinanced. However, they don’t have to provide this information when a loan is first taken out.

The FCA has also introduced rules that require payday loan adverts to include a ‘wealth warning’. Any advertisement should include the following statement ‘Warning: late payment can call you serious money problems. For help, go to’

Lenders who don’t comply with the new rules risk being shut down, with the FCA estimating that up to one in four firms could be forced of business.

Are any other further steps being taken to protect consumers?

Yes, the FCA is currently working on introducing an interest rate cap, so that payday lenders can’t charge rates above a certain limit. It plan to start consulting on how this will work in July, and the cap is due to come into effect in January next year.

What if I have a complaint about a payday loan?

Your first step should be to contact the lender directly. If you aren’t satisfied with their response, or don’t get one in eight weeks, you can take your complaint to the Financial Ombudsman Service, which will investigate on your behalf.

What are the alternatives to a payday loan?

You may want to consider a credit card instead of a payday loan.  Provided you pay off what you owe within a month – as you would have to with a payday loan – borrowing is interest-free.

Alternatively, if your credit rating is less than perfect, you may want to speak to your local credit union, as they may be able to help you. A credit union is an independent local co-operative organisation whose aim is to help those who might not have access to financial products from banks and building societies.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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