Finance glossary
Payday Loan
Also known as: High-cost short-term credit, Short-term loan
In simple terms
A payday loan is a small, short-term loan meant to tide you over until payday. It is quick to get but very expensive, so it is one of the costliest ways to borrow.
On this page
What does payday loan mean?
A payday loan is a type of high-cost short-term credit — a small amount borrowed for a short period, often until your next payday. They are marketed as fast and easy to arrange, usually with minimal checks compared with mainstream lending.
Because the interest rate is very high and the term very short, payday loans are among the most expensive ways to borrow and are best used only as a genuine last resort.
How a payday loan works
You borrow a small sum and agree to repay it, plus interest and any charges, within a short window. Repayment is often collected automatically from your bank card on the agreed date using a continuous payment authority.
Since 2015 the FCA has capped the cost of high-cost short-term credit: interest and fees cannot exceed 0.8% of the amount borrowed per day, default fees are capped at £15, and — crucially — you can never repay more than twice (100% of) the amount you originally borrowed.
How could this affect me?
Even with the price cap, payday loans are expensive and can be hard to repay on a tight budget, sometimes leading to repeat borrowing. Taking one can also make some lenders wary when you next apply for credit.
If you are considering a payday loan, it is usually worth checking cheaper options first — an authorised overdraft, a credit union loan, or talking to your existing creditors — and getting free debt advice if money is tight.
Things to watch out for
- These are among the most expensive ways to borrow, even with the cost cap.
- Repeatedly rolling over or re-borrowing can trap you in a cycle of debt.
- A continuous payment authority can take money from your account automatically — you can cancel it with your bank.
- Consider a credit union, authorised overdraft or free debt advice before borrowing.
Know your rights
- The FCA cost cap means you can never pay more than 0.8% per day in interest and fees, default fees are capped at £15, and total charges can never exceed 100% of the amount borrowed.
- You can cancel a continuous payment authority by telling your bank, which must then stop the payments.
- Payday loans are regulated consumer credit, so you get pre-contract information and normally a 14-day right to withdraw.
- If a lender lent without checking you could afford it, you can complain and escalate to the Financial Ombudsman Service.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- FCA, CONC 5A — cost cap on high-cost short-term credit (opens in a new tab). Accessed 22 Aug 2026.
- MoneyHelper, Payday loans — what you need to know (opens in a new tab). Accessed 22 Aug 2026.