A payday loan is a small amount of money you can borrow for up to 12 months which accrues interest and is typically repaid over your next few paydays. Loan sums are usually less than £1000, with the average borrowing amount being between £200 and £300. This is because payday loans are designed to help with emergency one-off expenses which often cost in the low hundreds. They are popular because it’s almost impossible to find a loan for a similar amount elsewhere, and they cater to a wide demographic of people – including those who might have a poor credit history or a low credit score. Payday loans fill a gap in the lending market that has long been overlooked by mainstream lenders and government initiatives – just because you may have a bad credit history, it doesn’t mean you never need to borrow or that you can’t afford the repayments.
Payday loans, also known as short term loans and same day loans, are a type of high cost short term credit and all authorised payday lenders in the UK are regulated by the Financial Conduct Authority (FCA).
Payday loans started in America in the early 1980s, though the concept of fast cash with short loan terms has been around much longer, especially since early bank loans were only accessible by the wealthy portion of society.
Payday loans came to the UK in the late 80s and became popular in the form of pawnshops and cheque cashing. The last three decades of payday lending has changed considerably, with most lenders providing an online loan service only with no security (as is necessary for pawnshops) so this facilitates an even speedier process and makes short term loans accessible for nearly everyone.
Payday loans faced a lot of controversy in the early years of the last decade, but like many borrowing avenues they are constantly evolving. Payday loans have been strictly regulated by the FCA since 2014. They were regulated by the Office of Fair Trading before that, and all authorised lenders have undergone several changes since then. The most notable of which include an interest rate cap of 0.8% per day and a maximum repayment of 100% of the loan principal. For example, if you borrowed £100, you would never repay more than £200 – and the repayment amount would only reach this maximum if you failed to make your repayments and your loan was left overdue for some time.
One of the biggest changes is the movement of payday loans from high street branches to online services. Almost no payday lenders have any physical branches anymore because of the ease and accessibility of having an online presence instead. Online applications allow for quick decisions and instant transfers, so consumers can receive the money they urgently need as soon as possible. While there may be one or two lenders that still operate a high street business, it’s clear from all the lenders who moved to a digital-only platform that online payday loans are preferred by most consumers.
If you’re thinking about payday loans direct lenders are often a go-to for most people but it’s important you do a little bit of comparative research first. While all UK payday lenders must be authorised and regulated by the FCA, not every lender operates in exactly the same way. For example, some lenders may offer six month loans where others only offer up to 3 months. Comparing lenders helps you find a payday loan that’s right for you in your circumstances. This can result in a smoother application process and can make managing the repayments easier as they may better align with your paydays.
The main things to consider when comparing loan lenders are:
While payday loans are capped at a 0.8% interest rate per day, some lenders provide loans with a lower rate of interest so it’s still worth looking around. Try to avoid using the APR (annual percentage rate) to compare payday loans interest rates as this can be an inconsistent metric as it may vary depending on the amount borrowed and how long you’re borrowing for.
Some lenders may only offer 1 loan repayment frequency, for example on the 25th of each month. If you are paid weekly or on the last Thursday of each month, then your paydays might not align with your repayment dates making it more difficult to manage your repayments. By comparing lenders, you might find a loan which caters to your exact paydays.
Hopefully, you’ll be able to make all of your repayments on time, but if something came up, you’d like to know that your creditor replies to queries quickly and will work with you to arrange a new repayment plan or amend a repayment date. By checking customer feedback on review sites, you can see how other customers have found the service and it might help you make the final decision.
Payday loans have a relatively short history compared to other lending products like overdrafts, but that doesn’t mean little has changed. Payday loans have undergone a lot of reform and new regulation and the financial services sector is constantly working to improve all lending products for the customers’ benefit. It might be making sure affordable credit is available to consumers, increasing competition in the market so that customers have a good range of products to choose from or even ensuring that customers are offered fair forbearance for when things go wrong. Payday loans have a short history but they’re a useful and popular way to borrow at the moment, and they most likely will be around for many years to come.
All you need to know about short term loans
The best saving tips, budget ideas and ways to improve your financial health