UK Payday Loans – Everything You Need to Know in this simple guide

By | Last Updated: 14th September 2019 | This post may contain Affiliate Links

Payday loans have increased in popularity over the last decade or so, however are they right for your needs and situation?

Before applying for a loan, you should consider your options and see if there’s another form of loan which may be more applicable.

Although one of the ‘major’ benefits of payday loans, is the fact they can be set up in a matter of minutes, they can sometimes quickly turn into a ‘problem’ for many people.

In the UK, payday loans tend not to be offered by mainstream lenders, such as banks and building societies, you’ll need to find an independent provider.

How do Pay day Loans work?

Payday loans are designed to be a short-term loan, which helps people who are short of money until their next payday, hence the name.

Typically, a person will ‘apply’ for an amount of money and if accepted its deposited directly into their bank account. The payday company ‘earns’ their money, from the amount borrowed plus interest which the customer must pay back. This is normally a high-interest rate.

In most cases, payday loans are available for up to three months, but some providers offer longer duration’s. Remember the longer the duration, the more interest you’ll normally pay back.

Remember if you fail to repay your loan or miss payments, this will be recorded on your credit file. This will make it harder for you to obtain credit in the future.

If you’re already in debt problems, payday finance can easily make your situation worse, if you can’t afford to pay it back on time.

UK Payday Loans Explained

What is the Payday Interest Rate?

There’s no ‘standard’ interest rate, each provider will charge a different amount. It’s not ‘uncommon’ for annual percentage interest rates (APR) to charge up to 1,500%. This is high compared to an ‘average’ credit card, which usually charges around 22% APR.

The UK Government has ‘capped’ the cost of payday loans under law, these rules were made by the Financial Conduct Authority, also known as the FCA. The cap means a customer will never pay back more than twice what they initially borrowed. This only ‘applies’ to companies which are regulated by the FCA, some companies may not be, so unlawfully they could operate ‘outside’ of these rules

For example, under the FCA rules, let’s say someone gets accepted for a loan for 30 days, they will typically pay no more than £24 in fees and charges per £100 borrowed. If they don’t repay on time, the most they can be charged in late payment fees is £15 plus interest on the amount they borrowed.

Check whether your money lender is registered on the FCA website .

Should you get Payday Credit?

People need money for many reasons, typically if you’re looking for a loan to cover the following payday loans are usually not the answer. Don’t use payday finance for:

  • The rent or mortgage
  • Household bills – such as council tax, utility bills, heating, etc
  • To pay ‘back’ somebody you owe

Remember nobody can truly understand your situation to say why you may need a quick loan. Only you can do that for yourself.

Don’t be ‘fooled’ into the trap of easy money, some people use payday loans for purchasing new clothing, nights out, holidays and so on. Typically, if you can’t afford them at the time, they’ll usually cost you far more ‘in the long run’ once interest has been added.

If you find yourself struggling to pay for essentials, please use our Monthly Budget Calculator to see where you’re overspending and how you may save money.

Equally, you can also speak to a debt advisor, there are many ‘free’ options such as the National Debtline, StepChange Charity, Citizens Advice, Debt Advice Foundation and more.

Is there a cooling off period?

Yes, there is. Under the Consumer Credit Act, you have a 14-day cooling-off period from the time in which the agreement begins. This normally begins at the time you signed the agreement or received the agreement (in the post or via email), whichever is later.

Even if you decide to cancel, you’ll need to pay back the full amount borrowed plus any ‘interest’ for the duration you’ve had the credit. This could be one day’s interest, five days or 14 days, or somewhere in between. Please read your providers terms and conditions for further information.

Alternatives to Payday Loans in the UK

There are other ways of borrowing money in England, payday loans can easily ‘wreck’ lives and should only be used if you’re sure about what you’re doing and can afford to pay the loan back.

Borrowing from friends and family – Although this may seem like an obvious option, borrowing money from a friend or family member can help you to avoid the risks with payday credit. If you do lend money from somebody you know, you should always get the agreement in writing, work out a repayment plan and talk about what will happen should you fail to repay the money back or miss a payment.

Using an authorised overdraft – You should never ‘dip’ into an unplanned overdraft, if you have a current bank account, you could talk to your bank about getting an authorised overdraft facility. Usually you’ll have a limit, this can vary depending on your circumstances, however an authorised overdraft is generally cheaper than payday finance interest. The interest rates on a bank overdraft vary from each provider, so please check with your bank and building society for more information.

Using a credit card – In ‘most’ cases, credit cards will offer a much lower interest rate than UK payday loans. Please check your interest rate with your bank or provider and compare the amount. It’s always recommended to pay off a credit cards balance, in full at the end of each month if you can.

Peer-to-peer lending – Although fairly new, peer-to-peer lending also known as P2P, has become quite popular over the last few years. Typically, you can get low rates if you have a good credit score and can decide on the how much you require, and the repayment plan you’d like. Most P2P platforms will have a decent number of lenders and borrowers from across the world.

Lend from a credit union – Typically a credit union is an affordable lending solution, there’s a cap on the amount of interest they can charge. This is 3% a month or 42.6% APR in England, Scotland and Wales. It’s 1% a month or 26.8% APR for Northern Ireland.