Glossary · UK
What is Payday Loan?
A small, short-term high-cost loan designed to be repaid on the borrower's next payday, now subject to an FCA price cap limiting total repayable interest and fees.
Full Definition
A payday loan is a small-value, short-term loan, historically marketed as a way to bridge a gap until the borrower's next payday, typically for amounts up to around £1,000 repayable within a few weeks to a few months. Payday loans carry very high headline interest rates compared with mainstream credit, reflecting both the short duration and the higher risk lending to customers who may not qualify for cheaper credit. Since 2015, the Financial Conduct Authority has capped the total cost of payday and other high-cost short-term credit: interest and fees cannot exceed 0.8% of the amount borrowed per day, default fees are capped at £15, and the total cost of interest, fees and charges over the life of the loan can never exceed 100% of the amount originally borrowed, meaning a borrower can never be required to repay more than double what they borrowed. Lenders must also carry out affordability checks before approving a loan, and repeated rollovers (extending the loan by paying only interest) are restricted to a maximum of two, to prevent debt spiralling. Missed payday loan repayments are reported to credit reference agencies and can significantly damage a credit file, and because of the price cap and stricter regulation, the number of payday lenders operating in the UK fell sharply after the rules were introduced, with the sector partly replaced by other forms of short-term credit such as Buy Now, Pay Later.