What are payday loans?

You’ve probably heard the term, but what does a payday loan actually mean?

If you’ve ever had a bill land at the wrong time, maybe just before payday, you’ll know how stressful that can feel. When there’s not enough money in the bank and something urgent comes up, it’s natural to look for a quick fix.

That’s where payday loans come in. They are designed to help cover short-term financial gaps, often for unexpected expenses. But like any borrowing, they come with risks as well as responsibilities.

At Dot Dot Loans, we’re a credit broker, not a lender. That means we don’t lend money ourselves. Instead, we help people find payday loan options from FCA-authorised lenders. We don’t make lending decisions, and we never charge you for using our service.

Let’s take a closer look at what payday loans are, how they work, and what to consider before applying.

What is a payday loan?

A payday loan is a small, short-term loan that’s typically used to cover emergency costs until your next payday.

People usually borrow between £100 and £1,000, although the exact amount depends on the lender and your individual circumstances. These loans are usually repaid in full within one to three months, either in one lump sum or across a few instalments.

Payday loans are a type of high-cost, short-term credit. That means they typically have higher interest rates than other forms of borrowing, because they are designed to be repaid quickly and without long-term commitments.

They can be useful in certain situations, but it’s important to understand how they work and make sure they are affordable for you.

A brief history of payday loans

Payday loans became widely available in the UK in the early 2000s. Back then, they were often repaid in full on your next payday, which is where the name comes from.

Unfortunately, some lenders didn’t act responsibly. Borrowers were being charged extremely high interest rates, and many ended up stuck in a cycle of debt. Some lenders, such as Wonga, were known for charging annual interest rates of more than 1,000 percent.

In response, the Financial Conduct Authority (FCA) introduced strict rules to protect borrowers. There are now caps in place to stop lenders from charging excessive fees:

• Daily interest is capped at 0.8 percent
• Default fees are limited to £15
• The total amount repaid cannot be more than twice the amount borrowed

These rules have made the market safer, but payday loans are still considered a high-cost option and should not be used for long-term financial issues.

Who might use a payday loan and why?

Everyone’s situation is different. Here are a few examples of when someone might consider a payday loan:

• Car repairs. You need your car to get to work, but it breaks down unexpectedly. You don’t have the money to cover the repair and payday is still a week away.
• Emergency vet bill. Your pet suddenly needs treatment, and the cost wasn’t something you had budgeted for.
• Overdue energy bill. You receive a final notice for your gas or electric and need to pay quickly to avoid disconnection.

These are the types of real-world emergencies that payday loans are intended to help with. The key thing is that they are for short-term, one-off situations, not regular expenses.

The risks of payday loans

While payday loans can be helpful in some cases, they are not risk-free. It’s important to be aware of the potential downsides:

• High interest rates. Because they are short-term and unsecured, payday loans often come with higher costs than other types of borrowing.
• Debt spirals. If you can’t repay the loan on time, you might feel tempted to borrow again to cover it. This can lead to a cycle of debt.
• Impact on credit score. If you miss repayments, this will show up on your credit report and can make it harder to borrow in the future.
• Not suitable for long-term needs. Payday loans are not designed for ongoing money problems. If you find yourself regularly relying on them, it’s worth looking at other types of support.

Think of it like this: using a payday loan is like getting a taxi when the last bus has gone. It can get you to your destination quickly, but it costs more and isn’t something you’d want to do every day.

How Dot Dot Loans fits in

Dot Dot Loans is a regulated credit broker, not a direct lender. We help connect you with suitable payday loan options, but we don’t make the final decision and we don’t provide the funds.

Here’s what we do:

• Help you compare loan options from FCA-authorised lenders
• Use a soft search to check eligibility, which won’t affect your credit score
• Provide the service completely free of charge
• Give you full transparency before you choose whether to apply

You’ll see your potential loan offer before you decide to move forward. If you choose to apply, the lender will then carry out their own checks and decide whether to approve your application.

How the application process works

When you apply through Dot Dot Loans, here’s how it usually works:

1. Fill out our short form. This takes just a couple of minutes and includes basic details about your financial situation.
2. We do a soft search. This checks your eligibility without impacting your credit report.
3. We match you with a lender. If a lender on our panel is likely to approve your application, we’ll show you the offer.
4. You decide whether to go ahead. If you’re happy, you can proceed to apply directly with the lender.
5. The lender makes the final decision. They’ll run their own checks, including a hard credit search, and transfer the funds if approved.

There is no guarantee of approval. Each lender has their own criteria and will only lend if they believe the loan is affordable.

Alternatives to payday loans

Payday loans are not your only option. Depending on your situation, you might want to consider:

• An arranged overdraft. If your bank offers one, this could be a more affordable short-term solution.
• A credit union loan. These not-for-profit organisations often offer fair rates and are focused on helping their members.
• Budgeting loans or advances. If you’re receiving certain benefits, the government may offer short-term financial help.
• Payment plans with your provider. Whether it’s energy, rent, or council tax, many companies will offer flexible payment plans if you explain your situation.
• Support from friends or family. It might feel awkward, but borrowing from someone you trust could save you money on interest and fees.

Real-life example

James, a warehouse worker, needed to replace his broken washing machine. He didn’t have savings and his next payday was still two weeks away. He used Dot Dot Loans to see his options and was matched with a lender offering a loan over two months. James made sure to budget for the repayments and paid the loan back on time without needing to borrow again.

FAQs

Final thoughts

If you’re thinking about applying for a payday loan, make sure you understand what it involves. It’s a fast option for short-term emergencies, but it comes at a cost and isn’t suitable for ongoing financial issues.

At Dot Dot Loans, we’re here to help you explore your options safely. You won’t be charged for using our service, and checking your eligibility only takes a few minutes.

It won’t affect your credit score, and you’re under no obligation to go ahead. If a payday loan feels like the right option for you, we’re here to help you take that next step.