Know the real cost of payday loans

Payday loans are a risky and expensive way of getting a short-term cash loan. If you can’t pay off the loan on time, you can run up big debts very quickly. You could even put your home at risk.

Short-term payday loans

Payday loans are small, short term loans, usually less than £500. They are meant to help people until they next get paid, at which point the loan is supposed to be repaid in full.

Interest rates for payday loans are very high. The annual percentage rate (APR) can be as much as 4,000%. 

If you can’t pay the money back when it’s due, the lender will often ‘roll over’ the loan for another month and you’ll run up extra interest charges. You may also have to pay a penalty fee.

How payday loans work

Many payday loan firms do business online, but there are some on the high street too.

Applying for a payday loan online usually involves filling in a form on the lender’s website. Often you’ll be asked to provide more details by phone or post. Some lenders may also ask you to fax personal documents.

The lender will do a credit check before offering you a loan. If they agree to lend you the money, it will be paid straight into your bank account.

They will also ask you to make arrangements with your bank to pay back the loan on an agreed date. When the loan is due to be repaid, they will take the payment for the full amount, plus the interest, from your bank account. 

Some lenders will instead ask you to send them a post-dated cheque. They will cash this on the date when the loan is due to be paid back.

Use Shelter's budget calculator to help you manage your money.

What you could end up paying

Payday loans offer you quick cash. But they aren't cheap, even if you stick to the agreed date for paying off the loan.

The interest rates on payday loans are much higher than those on most other types of borrowing, such as agreed overdrafts, credit cards and personal loans.

Annual percentage rates (APRs) of more than 1,500%, or even 4,000%, aren’t unusual. This means that even if you pay back the full amount when it’s due, you’ll end up paying a large amount in interest. For a loan of £300 at an annual interest percentage rate of 1,737%, you would have to pay back £375 if you borrowed the money for 30 days.

You may get into more debt if you can’t pay back the loan on the due date. The lender may then ‘roll over’ the loan for another month and you’ll have to pay another 30 days’ interest on the loan, plus the interest that’s already built up on it.

Payday loans if you have a bad credit rating

Although payday lenders may accept your application if you have a bad credit rating, that doesn’t mean they will give you a payday loan.

Some payday loan firms claim that they won’t run a credit check on you. But these firms usually pass on your application to another firm that actually lends the money, and they do the check.

If you’re late paying off a payday loan

If you have taken out a payday loan and find that you are struggling to keep up with payments, contact your lender and let them know.

You should get expert advice straightaway.

Remember that paying your rent or mortgage on your home should always be your first priority. Otherwise, you could risk going into arrears and being evicted. You can call Shelter’s helpline on 0808 800 4444 to get free advice on dealing with rent and mortgage arrears.

See our page on what happens if you can’t pay back a payday loan.

Alternatives to payday loans

There are safer alternatives to payday loans, especially for people with poor credit ratings:

Credit unions offer affordable borrowing to people who can’t get loans from banks or other finance providers. They often charge less than 2% interest a month (26.8% APR). At this rate, a loan of £100 over 12 months costs a maximum of £2 each month in interest. Find your local credit union and check if you are eligible for membership.

Choosing a payday loan firm

If you’re still considering taking out a payday loan, make sure you shop around and compare the interest rates and charges before you choose a lender.

Check the terms and conditions very carefully, especially for details of what happens if you 'roll over' the loan. Make sure you understand the lender's rules on charges and penalties if you can't pay the loan back.

Avoid loan sharks

Before taking out any loan, use the FCA website to check that the lender has a consumer credit licence. Having this licence is a legal requirement for all lenders.

Anyone who lends money without a licence is a loan shark, in other words an illegal lender.

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