Payday loans: how they work

The payday loan market is growing fast in the UK. We explain how these expensive loans work and help you find alternative ways to borrow.

What are payday loans and how do they work?

A payday loan is a short-term advance designed to tide you over financially until payday. Online payday lenders include, Paydaybank and Paydayloan.

Some payday loan companies, such as, allow you to choose the repayment period, rather than basing it on when you receive your salary.

The payday loan is usually paid straight into your bank account, often within 24 hours of your application being approved. The payday loan repayment, plus interest, is then taken directly from your bank account on the due date. The typical charge is about £25 per month for every £100 borrowed. Advertised interest rates (APRs) are typically around 1,750%.

If you’ve taken out a payday loan and struggling to pay it back, read more about your rights with payday loans, including template letters for writing to your payday lender.

Are logbook loans the same as payday loans?

No. So-called ‘logbook loans’ are secured against your car, so if you fail to make repayments you could lose your vehicle, as well as having to pay the high interest charges. As there are often no credit checks, customers who are struggling with other debt could be tempted by these loans, putting their vehicle, and their finances, at risk.
What are the alternatives to payday loans?

If you’re desperate for cash, payday loans may seem like the best choice. But there are alternatives. For example, current account authorised overdrafts are usually much cheaper than payday loans for short-term borrowing. However, unauthorised overdrafts are generally more expensive, so avoid them.

Another alternative is to join your local credit union. Credit union loans take longer to arrange, but are limited by law to an APR of 26.8%.

The government’s Social Fund can also provide crisis loans for emergencies and budgeting loans for those on benefits. To find out if you qualify, contact Jobcentre Plus on 0800 032 7952.

Even credit cards aimed at people with a poor credit history an offer a better deal than payday loans. With a high APR of more than 30%, you’ll still pay less interest with this sort of credit card, but only if you’re disciplined and pay it off over a short period.

If you only make minimum repayments, miss a payment or go over your limit, you’ll not only damage your credit rating, but you could also face penalty charges and your debt can spiral out of control.