Payday loans are not automatically ‘bad’, but they are an expensive way to borrow and are easy to misuse. Used carefully for a genuine short term need, they can help; used repeatedly, they can cause problems.
This guide explains the pros, the cons and the alternatives, so you can weigh the cost, the timing and the alternatives.
The risks to understand
Because they are short term and high cost, payday loans can be hard to repay if your circumstances are already tight, and rolling them over adds cost. The FCA caps protect you, but they do not make borrowing free.
- A high APR and a short repayment schedule
- Repayment due quickly, often on payday
- Repeated use can signal wider money strain
Alternatives to compare
A longer term instalment loan may reduce your monthly repayments by spreading the cost over a longer period. However, a longer term can increase the total amount you repay. Always compare the APR, monthly repayments and total amount repayable before deciding.
Credit unions, arranged overdrafts and lower rate personal loans may be cheaper depending on your circumstances and the rates available. Compare the total amount repayable before choosing, and free help from MoneyHelper may ease the pressure first.
When they help and when they hurt
For a genuine one off need that cannot wait, a payday loan can bridge a short gap. The problems tend to start with repeated use, where the cost adds up and one loan leads to another. If you find yourself borrowing month after month, it is a sign to seek cheaper options or free money guidance.
How the FCA caps protect you
The Financial Conduct Authority limits the cost of high cost short term credit, which offers real protection even though it does not make borrowing free.
- Interest is capped at 0.8% per day of the amount borrowed
- Default fees cannot exceed £15
- You never repay more in interest and fees than you borrowed
How to apply
Borrowing responsibly
It is worth making sure the monthly repayment fits comfortably around your other commitments before you apply. Focus on the total amount repayable across the full term, not just the headline monthly figure, and only borrow what you really need.
Every lender and credit broker on our panel is authorised and regulated by the Financial Conduct Authority for the activities they carry out, and high cost short term credit is subject to an FCA total cost cap, meaning you cannot repay more in interest and fees than the amount borrowed. If money is tight, free and impartial help is available from MoneyHelper.
Dot Dot Loans searches for both short term and instalment loan options. The representative example below is for an 18 month instalment loan and is not an example of a traditional payday loan repayable on your next payday.
Representative Example: Borrow £1,000 over 18 months. 18 monthly repayments of £89.22. Total amount repayable: £1,605.96. Interest: £605.96. Annual interest rate: 59.97% (fixed). Subject to application approval by the lender. Not all lenders offer loans up to £5,000. Representative APR 79.5% (Variable). Any representative monthly repayment shown is for illustration only, based on our representative APR. Your actual repayments will be confirmed by the matching lender if your application is approved.