TL;DR
Payday loans are capped at 0. They remain expensive and default triggers fees
Last reviewed: June 2026 | Sources: Debt & Credit
|
Debt & Credit Key Facts: Payday Loans Daily rate cap: 0.8% per dayTotal cost cap: 100% of amount borrowedDefault fee cap: £15Regulator: FCAFree alternatives: credit unions, employer advance |
What payday loans are and how they work
Payday loans are short-term, high-cost credit products designed to bridge a gap until the next payday. Since FCA regulation took effect in 2015, payday loan interest is capped at 0.8 percent per day and the total cost of a loan cannot exceed 100 percent of the amount originally borrowed. A £200 loan can cost at most £400 in total including all fees and interest.
The risks most people do not check
Rolling over or extending compounds costs rapidly. While the FCA has restricted rollovers to two, each extension adds further interest. A £200 loan extended twice approaches the total cost cap quickly and leaves the borrower with the same underlying cash shortfall.
Default damages credit and triggers fees. Missing a payday loan repayment results in a default fee of up to £15 and a default recorded on your credit file. Payday loan defaults are visible to all lenders for six years and can affect mortgage, credit card and other loan applications.
CPA authorisation allows repeated payment attempts. Payday lenders take repayment via continuous payment authority, which allows them to attempt to take payment from your account multiple times. This can result in bank charges if the account has insufficient funds and can leave you without money for essential spending. You can cancel a CPA by contacting your bank.
The FCA register confirms legitimacy. Unlicensed payday lenders operating outside FCA regulation charge higher rates and have fewer restrictions. Always verify FCA authorisation before borrowing.
Regulated alternatives worth checking first
FCA-regulated credit unions typically charge significantly less than payday lenders and are designed to serve members with limited credit histories. Employer salary advance schemes allow workers to access earned wages before payday at minimal or no cost. Some banks offer arranged overdrafts or short-term credit facilities at lower effective rates. Community Development Finance Institutions provide affordable credit to people unable to access mainstream lending.
What to verify before borrowing
Calculate the total repayable, not just the weekly or daily rate. Verify FCA authorisation at register.fca.org.uk. Confirm whether the lender uses CPA and how to cancel it if needed. Explore credit union membership before applying for a payday loan.
Where to complain
Payday lender complaints go to the Financial Ombudsman Service after the lender's internal process. The FCA has taken significant enforcement action against payday lenders for unfair practices; reporting systematic issues to the FCA directly is appropriate where behaviour appears systemic.
|
Disclaimer This article is for information only and does not constitute regulated financial advice. Always verify current terms with relevant providers and seek regulated advice for your specific circumstances. Kael Tripton Ltd is an independent editorial publisher and is not regulated by the FCA. |
Frequently asked questions
What is the FCA interest rate cap on payday loans?
The FCA caps payday loan interest at 0.8 percent per day of the amount borrowed. The total cost including all fees and interest cannot exceed 100 percent of the original loan amount. Default fees are capped at £15.
Can a payday lender keep trying to take money from my account?
Lenders authorised via CPA can make multiple payment attempts. You can cancel a CPA by instructing your bank to stop payments to that merchant. The lender must stop attempting payment once the CPA is cancelled.
What is a credit union and how do I join one?
Credit unions are member-owned financial cooperatives that offer savings and loans to members. Eligibility is based on a common bond such as where you live or work. The Bank of England maintains a directory of UK credit unions.
Does a payday loan affect my mortgage application?
Yes. Mortgage lenders view payday loan use negatively as it indicates cash flow stress. Even repaid payday loans visible on bank statements can affect mortgage affordability assessments. Some lenders decline applications where payday loans appear on statements in the previous 12 months.
What should I do if I cannot repay a payday loan?
Contact the lender immediately before the repayment date and explain your circumstances. FCA rules require lenders to direct struggling borrowers to free debt advice. Contact StepChange or National Debtline for independent support.
|
Sources FCA: Payday Loans Consumer Information |
