Payday loans explained

What is a payday loan?

Payday loans are short-term loans, designed to help people cope with small, unplanned expenses. They typically range from £50 to £1,000. Payday loans can be relatively easy to get, but their interest rates tend to be much higher than other forms of credit – it’s not uncommon for them to have an APR of 1,500%. You’ll usually pay off a payday loan the next time you get your salary, although some lenders allow more flexibility. The payment is often taken out by direct debit, so it’s important to have enough funds in place – charges for missed payments can build up very quickly.

Who can get a payday loan?

Anyone over 18 can apply for a payday loan. But whether you’re approved depends on your credit history and other financial information, as well as the payday company’s own criteria.

The lower your credit score is, the less likely you are to be approved. There are some companies that specialise in ‘bad credit’ payday loans, meaning they may accept you even if your score is low. However, you may have to pay even higher interest fees as a result.

Will a payday loan affect my credit score?

Usually, your score won’t be damaged by a payday loan, as long as you repay it in full and on time. There may be exceptions though: if a particular company sees payday loans negatively (e.g. because they believe payday loan customers are less reliable borrowers), then having one in your credit history could count against you. Also keep in mind any loan application can temporarily reduce your credit score due to the hard search and a new credit account being added to your profile.

Remember, you don’t just have one credit score. Credit reference agencies, lenders and other companies will calculate your score using their own methods and criteria. So, a payday loan may affect your score differently with different organisations. Many lenders know that customers who use short-term loans aren’t necessarily in dire financial straits – in fact, some don’t even differentiate between payday loans and other loans.

What are the risks of payday loans?

One of the biggest risks is getting trapped in a cycle of debt – for example, borrowing money because you’re short on funds, then being short on funds again because you’re paying back a loan plus a lot of interest.

Payday loans can hit you with fees for not repaying them on time or in full. These fees are capped by the Financial Conduct Authority at £15 plus interest on the amount you borrowed. But considering how high rates are on payday loans – often around 1,500% APR – being unable to repay it can get very expensive.

Remember, interest is calculated as a percentage of the amount you borrow, and it’s usually charged daily for payday loans. So the larger your loan, and the longer you have it for, the more interest you’ll pay.

When is a payday loan a bad idea?

Getting a payday loan should never be taken lightly. If you’re already in debt, or you’re not 100% sure you can afford to pay it back, then it’s probably a bad idea.

Because of the high rates and risk involved in getting a payday loan, it’s generally not worth it for something that can be delayed, or to buy something you don’t really need. If this is the case, it may be better to save up, borrow from friends or family, or look for a cheaper form of credit.

As mentioned above, payday loans shouldn’t usually affect your credit score, but it really depends on the company’s criteria. So just in case, try to avoid getting a payday loan if you’ve got an important credit application coming up, such as applying for a mortgage. Mortgage providers can be particularly strict when assessing your affordability, and a payday loan could suggest that you’re in financial difficulty or that you’re not good at budgeting.

If you still think a payday loan is right for you, make sure you read the terms and conditions with a fine toothcomb, stick to a budget, and – crucially – ensure there are enough funds in your account on the repayment date.

What if I’ve got a payday loan and changed my mind?

If you got a payday loan 14 days ago or less – in other words, within the ‘cooling-off’ period – you can withdraw from the agreement. You’ll need to pay off the full amount you borrowed, plus interest. Any additional charges must be refunded to you.

How do I consolidate my payday loan

Some people choose to consolidate their payday loans, which can help simplify repayments and reduce the amount of interest you’re charged. Consolidation means moving debt from multiple accounts to just one account, ideally with a lower interest rate. This solution isn’t suitable for everyone though – and remember that applying for another account can lower your credit score.

How can I avoid payday loans?

One of the best ways to avoid a payday loan is to stick to a strict budget, and try and leave some money left over each month. However, life doesn’t always work like that. If you find yourself unable to cover urgent, unexpected costs, or struggling to meet regular payments because you’ve overspent, these may be some of your alternative options:

• Borrowing from friends or family

• Cutting back other costs

• Selling something you own

• Speaking with your existing lenders if you think you can’t repay them on time

• Considering another form of credit with a low limit, such as a credit card, personal loan, or arranged bank overdraft

You can check your chances of approval for credit cards and personal loans when you compare them with Experian. It’s completely free, and it won’t affect your credit score unless you apply. Just remember, we’re not a lender, we’re a credit broker working with a range of lenders^†.

Getting help

If you're worried about money, you're not alone. The charities below offer free, independent help and advice on dealing with debt.

• National Debtline
• StepChange Debt Charity
• PayPlan
• AdviceUK

The government-backed website MoneyHelper also has lots of useful information including a handy Debt Advice Locator tool that can help you find confidential debt advice.