Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.

What is a payday loan?

It is a lump sum of money you borrow from a payday lender, and pay back over a short period, such as a week or a month.

Payday loans are generally for people who have a poor credit record who need money quickly. This is why it is usually the most expensive type of borrowing you can get.

Why not to get a payday loan

  • Payday loans are incredibly expensive: Interest on payday loans can be up to 500%.

  • You can get stuck in a repeat cycle: It's easy to fall in a debt trap where you continually need to borrow to pay off previous debt.

  • Debt grows fast at these rates: At such high interest rates, you can easily owing many times the amount you originally borrowed.

What are the costs?

There are two costs associated with payday loan:

Interest: This is what you pay a lender to borrow money, and is usually shown as the annual percentage rate (APR). The interest you pay is spread over all your payments, meaning you could pay less if you clear your loan early.

As payday loans are usually taken out over a much shorter term, the APR does not give a fair reflection on how much interest you pay.

Payment fees: These can be for either missing or being late with a payment, e.g. 15 for each missed payment. The lender could also report your missed payment to credit agencies, making it harder for you to apply for credit in the future.

A payday loan isn't the only option, even if you have bad credit. There are several products that can get you money fast.

What are the alternatives to payday loans?

  • Overdraft: You could borrow money from your current account straight away if you already have an authorised overdraft facility.

  • Cash advance: You could borrow money by withdrawing from your credit card, however you will pay a cash advance fee and interest for taking cash out.

  • Money transfer: You could transfer cash from your credit card to your current account for a fee by calling your card company.

  • Personal loan: You could borrow money through a personal loan and pay the money back monthly, usually over a term longer than six months.

  • Guarantor loans: You can get a family relative or friend to act as a guarantor on a loan, which will make it more likely for you to be approved for a loan even if you have bad credit.

  • Bad credit loans: These are loans where lenders are more willing to consider your application to borrow money if you have bad credit. They are more expensive but much cheaper than payday loans.

What to do if you are struggling to repay your payday loan

If you have taken out a payday loan but are worried you cannot pay it back, there may be help available.

If you are finding it difficult to keep up with your loan payments, then you are considered to be struggling with debt. This includes:

  • You think you will miss your next payment

  • You have already missed a payment

  • You do not think you can pay your loan off over the term agreed

Important: If you are having financial difficulties speak to your lender straight away and explain your situation.

Speak to your lender

Your lender may put you on a repayment plan which changes your monthly payments to an amount you can afford. But this usually extends your loan meaning you pay back more.

If you cannot afford to pay the new amount offered in the repayment plan, contact the following debt charities for help:

Delay your payment

Payday lenders could offer you the chance to delay, or rollover, your payment date to the next month.

Using a rollover gives you another month to make your payment, but means you pay an extra month of interest on your loan.

However, the Financial Conduct Authority (FCA) now restricts how many times a lender can let you rollover.

How a payday loan affects your credit record

While a payday loan may accept you with a less than perfect credit history, it could also damage it further. Here is how a payday loan can affect your credit record.

If you have applied for a payday loan recently, whether accepted or not, it could cause a new mortgage application to get rejected.

A payday loan can damage your credit record:

When you apply: You get credit checked when you apply for any amount of money. This leaves a mark on your record, but only to show you have applied for credit.

If you do not meet the lender's loan criteria, your application may also get rejected, so only apply for loans you are eligible for.

The more times you apply for credit in a short period, such as six months, the bigger the impact on your credit record.

When you miss a payment: Your lender could report your missed payment to credit agencies, affecting any credit applications you make in the future. Speak to your lender if you are having financial difficulties. Don't wait until after you have missed a payment.

When you borrow more: Whether you apply through the same payday lender or with another, you go through a credit check.

Do not apply for another payday loan if you are already struggling to pay back your existing loan.