In April 2014, the Financial Conduct Authority introduced a price cap for high-cost short-term credit loans, with the purpose of reducing the cost for borrowers and protecting those struggle to repay. Here we explain exactly what those caps mean...
About this guide
The ultimate guide about payday loans is primarily written for the UK, however much of the information is just as applicable to other countries and regions outside of the UK in particular and to the US.
The guide applies to both payday loans and short-term loans, however for brevity, we’ll refer to both as payday loans throughout the guide. The differences between the two are explained further in.
In this guide
- What are payday loans and how do they work?
- What is the difference between a payday loan and a short-term loan?
- Ways to apply for a payday loan
- Payday loan costs
- Common payday loan questions
- Are payday lenders banks?
- Do banks offer payday loans?
- What are payday loan brokers and how can they help?
- How to check you are dealing with an authorised firm
- Can I apply for a payday loan?
- How does the application process work?
- What information will I need to apply?
What are payday loans and how do they work?
Payday loans are small unsecured loans designed to help when you need to make up a shortfall in your cash flow. They provide a fast access to money — in most cases funds are available in under an hour.
These loans are typically used by borrowers who cannot access traditional loans or credit because they have poor, thin or no credit history.
You can apply for payday loans online, over the telephone or via high street stores if they operate in your area.
You pay the loan pay back in full on your next payday, although some lenders let you pick your own repayment date, in which case, you can choose to borrow for as little as 1 day up to a maximum of 35 days.
Payday loans are typically for small amounts ranging from £100 to £1000 in UK. For comparison, the best loans online in US are ranging from $100 up to $5000 for installment loans.
In both cases, interest accrues daily, so the longer the loan is outstanding the more interest you have to pay back. The maximum amount of interest a lender can currently charge is 0.8% per day per £100 borrowed – that’s £4 per day on a £500 loan.
On the day repayment is due, the lender automatically takes the payment from your bank account.
What is the difference between a payday loan and a short-term loan?
Payday loans and short-term loans are very similar products. The only difference is that short-term loans are repaid over a longer period, typically from 3 to 12 months.
This makes short-term loans much more flexible than payday loans. Paying back a single lump sum, which would be the case with a payday loan, might not be convenient for everyone. Instead, short-term loans allow borrowers to repay the loan gradually over a number of monthly payments like personal loans.
Short term loans are generally cheaper than payday loans. Interest rates can be less than half, although the total cost will probably be more over time. Lenders also tend to offer higher loan amounts on longer term loans — typically up to £2000 on a 12 month loan.
The terms ‘payday loans’ and ‘short-term loans’ are often used interchangeably to mean the same thing. If you carry out an Internet search, chances are you’ll find lenders offering a mixture of the two products in the results.
Other names used to describe payday loans online are: same day loans, bad credit loans and instalment loans.
Although all of these loan types are fundamentally the same, different lenders have different products which vary in terms of amount and duration, so you may need to shop around to find the loan you want.
Ways to apply for a payday loan
You can apply for payday loans online, over the telephone or via high street stores if they operate in your area.
Online payday loans
When you apply online, there is usually no need to fax or email documents but you will need to answers questions about your work, income and expenses. You’ll also need to have an active email account, a mobile phone and a bank account with a debit card. After a short approval process of up to 30 minutes, the money is immediately sent to your bank account.
In-store payday loans
If you prefer to visit a local store you will need to take debit card, photo ID, proof of income and proof of address. Each lender is different so call them or visit their website first to ensure you meet their lending criteria. Expect most lenders to transfer funds into your bank account, however some independent lenders may still pay out cash loans.
Telephone loan applications
Some lenders may offer a telephone application facility. Make a call before you apply so that you can find out what information you’ll need to provide. This will enable you to gather the information together at your own pace rather than trying to frantically pull it together during the call. Alternatively, use our application checklist to prepare.
Payday loan costs
Payday loans are one of the most expensive forms of borrowing. Interest is charged on a daily basis, but unlike credit cards, you will be told how much you need to pay and when, upfront.
In the UK, there is a price cap on payday loans which limits what lenders can charge for the initial loan, and on default.
Common payday loan questions
Are payday loans only for people with bad credit?
Anyone can apply a payday loan but they are often used by people with bad credit or those with little or no credit history, who don’t have access to traditional forms of borrowing.
Am I guaranteed to be accepted for a payday loan?
Payday loans are never guaranteed. Lending decisions are based on your creditworthiness, which must meet the lenders criteria, and your ability to repay the loan. Sites that claim to fix you up with guaranteed payday loans are likely to be unreputable and should be avoided at all costs.
Is it possible to get a payday loan with no credit check?
Lenders are required to carry out appropriate affordability and creditworthiness checks, which on unsecured forms of lending like payday loans, will include a credit check. Credit brokers will find you a loan without carrying out a credit check but if you accept a lenders offer they will then carry out a credit check.
Are payday lenders banks?
No they’re not. They are companies that are authorised to provide consumer credit by the Financial Conduct Authority (FCA) — they’re often described as ‘microlenders’.
Do banks offer payday loans?
Banks don’t offer payday loans. Instead, they offer credit cards and overdraft facilities.
Credit cards and arranged overdrafts provide ready access to credit but you will need to have an arrangement in place with the bank or credit card provider beforehand.
Payday loans on the other hand, are an instant form of credit, which means you can get access to same day funds without any prior arrangement.
Unauthorised overdrafts are not recommended as they are one of the most expensive forms of borrowing — even more than payday loans. A slip in your cash flow can end up costing you £100’s in bank charges very quickly.
What are payday loan brokers and how can they help?
Payday loan brokers provide access to different payday lenders through one single application form. It means that you don’t have to shop around or fill in countless application forms.
If you’re looking for a payday loan but are unsure how to find the right lender or are just struggling time-wise, this might be the best option for you.
Loan brokers do the shopping around to find lenders that match your circumstances and loan needs. A good broker can save you time and find the loan you need faster without the hassle of checking out each lender yourself.
You apply with a broker online just as you would with a direct lender. Everything happens in real-time and the whole process just takes a few minutes. If approved, you’ll be redirected to the lenders website to view the offer. You just need to accept or decline it.
You’ll also protect your credit record. Each time you make an individual loan application, it is marked on your credit file. In the case of loans, too many applications in a short time is a bad thing and can negatively impact your credit score. However, when you apply with a broker, you receive a quote, which will only be marked on your file as an application if you take the loan out with the lender.
Credit brokers are regulated by the FCA just like direct lenders. If the broker charges a fee for the service, they must make it quite clear to you from the outset — but in reality most brokers do not charge fees and instead get paid an introductory fee from the lender.
How to check you are dealing with an authorised firm
Like any other industry, 99.9% of payday loan websites are operated by legitimate firms. That said, where your personal details are involved, it’s always wise proceed with care rather than haste.
Fraudsters can set up very convincing payday sites, which nestle inconspicuously among real sites in the search engines. Common ruses include illegal websites operating without FCA authorisation and clone websites passing themselves off as real firms by using their details.
If you’re unsure whether a firm is legit, check their details on the Financial Services Register, then if you’re still not satisfied, be prepared to walk away.
How to check the Financial Services Register
- Go to the register.
- There are a number of ways to find the company on the register. The quickest is by typing in their firm reference number (FRN), which should be displayed in the footer of the website you’re checking. If you can’t find the FRN, you can use other details to locate them, such as trading name or postcode, however, there should be no reason why the FRN isn’t present .
- Under the ‘basic details’ section, check the firm’s current status is ‘authorised’.
- Then, under the ‘trading names’ section, check the site you’re on is registered as a trading name of the firm. For instance, you would expect to see paydayloansguides.com or Payday Loans Guides if you were checking this site on the register. If the trading name isn’t registered, it could be a sign that the website is a phoney.
Can I apply for a payday loan?
Each lender is different and has different criteria, however there is some common criteria that you will need to meet.
- Be at least 18 years old.
- Live in the UK.
- Be in receipt of a regular monthly income.
- Have a bank account with a debit card.
- Be a mobile phone owner.
- Have an active email address.
How does the application process work?
The application process is carried out entirely online. Although many sites advertise a 1-2 minute application time, a more realistic number would be 15 minutes.
After the application is submitted (see information requirements below), an automated lending decision is made based on the details entered and the application is either accepted or declined .
If accepted, the application moves to the approval process, which takes up to 30 minutes. This is where more thorough background checks are carried out — at this point the lender may still decline the application.
After approval, the money is released and transferred to your bank account. Most lenders and banks operate what is called ‘Faster Payments’, which effectively means that cash is transferred almost instantly.
Once the transfer has been completed, the money is available to use.
What information will I need to apply?
When you apply for a payday loan, the information you will need to provide when you apply is pretty much standard across lenders.
Always ensure that you provide accurate information about your circumstances and valid contact information. If the lender has problems verifying your data or can’t contact you, you may be declined.
- Full name
- Date of birth §
- Marital status
- Number of dependents ¥
§ Minimum application age is at least 18, however some lenders may have a higher age criteria.
¥ Includes your partner, children under 18 and anyone else who relies on you for financial support.
- Home address
- Residential status
- Time at address
- Email address §
- Home phone
- Mobile phone ¥
§ You must have an active email address.
¥ You must be a mobile phone owner.
- Employment status §
- Employer name
- Time at employer
- Work phone ¥
§ Some lenders only accept applicants who are in permanent employment (full-time, part-time, self-employed), however, others accept other forms of regular income such as a pension or certain benefits.
¥ Information is used for verification purposes only, your employer will not be contacted.
Income and expenses
- Main monthly income (after taxes) § ¥
- Pay frequency
- Next two pay dates
- Pay method (into bank/cheque/cash)
§ This is your take home pay from work or your pension or benefit payment. Check the lenders website for what types of benefits are allowed.
¥ Each lender has there own minimum income criteria.
You will need to work out your total regular monthly outgoings in each of these areas:
- Housing costs (rent or mortgage)
- Credit commitments (credit cards min payment, loan payments, store cards etc.)
- Food spend
- Utility bills (gas, electric, phone, TV etc.)
- Transport costs (vehicles, public transport etc.)
- Other significant expenses
Note: these are ‘total’ figures – DO provide accurate estimations but DON’T fuss over the detail — lender don’t need to know that you spend £1.20 on a bus ticket to visit your mum each month, but they will want to know if you regularly spend £100 on petrol and insurance. Rounding your expenses to the nearest £5 – £10 will do.
- Name of bank
- Account number §
- Sort code
- Debit card type
§ Your loan is paid into this account.
So there you have it — a not so short, but hopefully sweet guide to payday loans. You’re payday ready!