Payday loans are designed to cover short-term cash shortfalls until your next pay date. They’re legal and regulated, but they carry very high costs compared to mainstream credit and a poor reputation among lenders when they appear on your credit file.
What is a Payday Loan?
A payday loan is a short-term, high-cost loan — typically £50 to £1,000 — designed to be repaid in full on your next payday (usually within 30 days). Some lenders now offer slightly longer terms of 2–3 months.
They’re part of a broader category called high-cost short-term credit (HCSTC), regulated by the FCA since 2014.
The FCA Price Cap — What You Can Legally Be Charged
The FCA introduced a binding price cap on payday loans in January 2015. No FCA-authorised lender can exceed:
| Component | Limit |
|---|---|
| Daily interest and fees | 0.8% per day |
| Default charge | £15 maximum (one charge only) |
| Total cost cap | 100% of the amount borrowed |
Example — borrowing £200 for 30 days:
| Cost element | Amount |
|---|---|
| Maximum interest (0.8% × 30 × £200) | £48 |
| Total repayable maximum | £248 |
| If you default (add £15) | £263 maximum ever |
You can never be charged more than you borrowed. On a £200 loan, you’ll never owe more than £400 total.
How Payday Loans Work
- Application — online or in-store, usually completed in minutes
- Affordability check — FCA-authorised lenders must assess whether you can afford to repay
- Funds transfer — often within hours, some within 15 minutes
- Repayment — typically by Continuous Payment Authority (CPA) on your stated payday
- Rollover — limited to two rollovers under FCA rules; each extends the loan at additional cost
Continuous Payment Authority (CPA)
Most payday lenders collect repayment via CPA — a type of recurring card payment. Unlike a Direct Debit, a CPA can be attempted multiple times at different amounts. You have the right to cancel a CPA by contacting your bank — this stops the lender taking money, but the debt remains.
The Real Cost vs. Other Borrowing
APR comparisons make payday loans look extreme, but APR is designed for long-term credit. A more useful comparison is total cost:
| Borrowing £300 for 30 days | Total cost |
|---|---|
| Payday loan (at FCA cap) | £72 |
| Authorised bank overdraft (typical) | £9–£18 |
| Credit union loan | £5–£15 |
| 0% purchase credit card | £0 |
| Unauthorised overdraft | Up to £30+ in fees |
If You Can’t Repay a Payday Loan
Step 1: Contact the lender immediately FCA rules require lenders to treat customers in financial difficulty fairly. Ask for:
- A repayment plan spread over several months
- A freeze on interest while you catch up
- A pause in collection activity
Step 2: Cancel the CPA if necessary Contact your bank (not the lender) to cancel the Continuous Payment Authority so funds can’t be taken without your agreement. This protects you from overdraft fees.
Step 3: Get free debt advice
- StepChange: 0800 138 1111 (free)
- National Debtline: 0808 808 4000 (free)
- Citizens Advice: in-person or online
Step 4: Complain to the Financial Ombudsman If the lender gave you a loan you clearly couldn’t afford, you may be able to claim a refund of interest. The Financial Ombudsman has upheld thousands of “irresponsible lending” complaints against payday lenders.
Claiming a Refund for Irresponsible Lending
If a payday lender gave you repeated loans you couldn’t afford — or ignored obvious signs of financial distress — you may be entitled to a refund. Thousands of people have successfully reclaimed interest through the Financial Ombudsman.
You may have grounds to complain if:
- You had multiple loans in quick succession
- You were approved despite being in obvious financial difficulty
- The lender rolled over your loan multiple times
- You had to borrow again to repay a previous loan
How to claim:
- Write to the lender’s complaints team
- If unsatisfied within 8 weeks, escalate to the Financial Ombudsman Service
- You have up to 6 years from the loan date (or 3 years from when you knew you had grounds to complain)
Note: Several major payday lenders (Wonga, QuickQuid, The Money Shop) have gone into administration. If your lender collapsed before you complained, check the relevant compensation scheme — Wonga customers received partial refunds via an administrator.
Payday Loans and Your Credit File
A payday loan appears on all three credit reference agencies (Experian, Equifax, TransUnion) for six years from the date of the loan or last activity.
Impact:
- Some lenders refuse applications entirely if payday loans appear in the past 12 months
- Mortgage lenders typically view payday borrowing as a sign of financial stress, even if repaid on time
- Multiple payday loans in a short period is particularly damaging
If you repaid on time, the record is still visible but less harmful after 12–24 months with no further issues.
How to Check if a Lender is FCA Authorised
Before borrowing, always verify the lender on the FCA Register:
- Go to register.fca.org.uk
- Search by company name
- Confirm status shows “Authorised” (not “Appointed Representative” or “Expired”)
Unlicensed lenders are loan sharks — HMRC and the FCA offer no protection if you borrow from them.
Alternatives to Payday Loans
| Alternative | Best for | How to access |
|---|---|---|
| Credit union loan | Most situations — low cost | Find your local one at findyourcreditunion.co.uk |
| Employer salary advance | If your employer offers it | Ask HR |
| Bank authorised overdraft | Small, very short-term | Contact your bank |
| Help to Save bonus | Universal Credit or Working Tax Credit claimants | Via GOV.UK |
| Local welfare assistance | Emergency needs | Contact your council |
| 0% purchase credit card | If you have decent credit | Compare on comparison sites |
| Community Development Finance | Bad credit, larger amounts | cdfa.org.uk |
| StepChange emergency fund | If already in debt crisis | stepchange.org |