How much does a payday loan actually cost compared to other borrowing?

Full answer

Payday loans are short-term, high-cost credit products, and since Financial Conduct Authority (FCA) price cap rules came into force in 2015, they've become significantly cheaper and safer than in the past -- but they remain one of the most expensive ways to borrow, and understanding the specific caps in place helps put the real cost into perspective. **The daily interest and fee cap** FCA rules cap the interest and fees a payday lender can charge at 0.8% of the amount borrowed for each day of the loan -- so on a loan of £200 taken out for 30 days, the maximum daily charge would be £1.60 a day (0.8% of £200), meaning a maximum possible interest and fee charge of £48 over the full 30-day term, though the exact figure depends on the specific loan term and how much is borrowed. **The total cost cap -- never more than 100% of the loan** Separately, and importantly, FCA rules also cap the TOTAL amount a borrower can ever be charged in interest, fees, and default charges combined at 100% of the original amount borrowed -- meaning if you borrow £200, you can never be required to repay more than £400 in total (the original £200 plus a maximum of £200 in all charges combined), regardless of how long the loan remains outstanding or how many charges accumulate. This total cost cap was specifically introduced to prevent the kind of spiralling, multiplying debt that made payday loans notorious before regulation. **Default fee cap** A specific cap also applies to default fees (charged if a payment is missed) -- currently capped at £15, preventing lenders from charging excessive, additional penalty fees on top of the interest already accruing, which was a common complaint about payday lending before the caps were introduced. **Why the effective APR still looks extremely high** Because payday loans are designed for very short terms (often a matter of weeks, sometimes even days), the SAME underlying daily rate, when annualised into an APR figure for comparison purposes, produces headline APR percentages that can look like several hundred, or even over a thousand, percent -- this can be misleading in isolation, since no compliant payday loan actually charges anywhere near that much in practice due to the total cost cap, but it does illustrate just how expensive this form of credit is on a like-for-like, annualised basis compared with other borrowing. **Comparing to other short-term borrowing options** Even with the price caps in place, a payday loan is typically far more expensive per pound borrowed, per day, than a 0% purchase credit card used within its interest-free period, a standard credit card even accruing interest, an arranged bank overdraft, or a personal loan from a mainstream lender or credit union -- payday loans should generally be considered a last resort, after other cheaper borrowing options and support (including speaking to your existing creditors about payment difficulties, or seeking free debt advice) have been explored. **Credit unions as a lower-cost alternative** Credit unions are non-profit, member-owned financial cooperatives that often offer small, short-term loans at substantially lower rates than payday lenders (many are legally capped at a maximum APR considerably below typical payday loan-equivalent rates), making them a worthwhile alternative to explore for borrowers who might otherwise turn to a payday loan, provided they're eligible to join a relevant credit union (often based on where you live or work). **Effect on your credit file** Taking out payday loans, even where repaid on time, can affect how some other lenders view your creditworthiness for future applications (such as a mortgage), since payday loan usage is visible on your credit file and some mainstream lenders view it as an indicator of financial strain -- this is a less commonly considered but genuinely important longer-term cost beyond the immediate interest charged. **Practical tip** Before taking out a payday loan, check whether a 0% purchase or money transfer credit card, an arranged overdraft, a credit union loan, or simply negotiating a payment plan directly with whoever you owe money to (such as a utility company) could meet the same short-term need more cheaply, since the FCA price caps make payday loans safer than in the past but they remain one of the most expensive mainstream borrowing options available.

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