Payday loans have long carried a reputation for being one of the most expensive forms of borrowing in the UK. While they can provide quick access to cash in emergencies, the true cost often surprises borrowers who may not be familiar with how interest is calculated. If you’re considering a payday loan, it’s important to understand not just the headline rates but also the way charges add up in practice.
Over the years, I’ve spoken to borrowers who were caught off guard by how quickly costs escalated, even on what seemed like small loans. This article will walk you through the details of interest rates, regulatory caps, and what you can realistically expect if you decide to borrow.
The Basics of Payday Loan Interest
Unlike traditional bank loans or credit cards, payday loans are designed for very short repayment periods—often just a few weeks. Because of this, lenders don’t usually quote interest as an annual percentage rate (APR) in the way most people are used to seeing. Instead, you’ll see daily or monthly interest rates, which can look deceptively small until you do the maths.
For example, a lender might charge 0.8% interest per day. That doesn’t sound like much, but if you borrow £100 for 30 days, you’ll owe £124 at the end of the month. Multiply that out to a year, and you’re looking at an APR of over 1,200%. This is why payday loans are often criticised as being extremely expensive compared to other borrowing options.
The Role of UK Regulations
In 2015, the Financial Conduct Authority (FCA) introduced strict rules to protect consumers from spiralling debt. One of the most significant changes was capping the daily interest that payday lenders can charge at 0.8%. The FCA also introduced a total cost cap: no matter what, you will never pay more than double the amount you borrowed.
This means if you borrow £200, the most you could ever repay is £400, including interest and fees. While this cap has improved the payday lending market, it doesn’t make these loans cheap—it just prevents the worst-case scenarios of endless rollovers and ballooning debt that plagued borrowers in the past.
Additional Fees to Watch Out For
Beyond daily interest, payday lenders may charge default fees if you miss a payment. The FCA has capped default fees at £15, but the missed payment will still accrue interest until repaid. This makes it crucial to plan repayment carefully.
Some lenders also charge early repayment fees, though many have moved away from this practice under regulatory pressure. Always read the terms before agreeing, as hidden costs can make a significant difference to the total you repay.
Real-World Examples
To put the numbers into context, let’s look at a simple scenario. Borrowing £100 for 14 days at the maximum daily interest rate of 0.8% would result in £111.20 owed. Stretch that to 30 days, and it becomes £124.
If you miss repayment and the loan rolls over another month, the total owed jumps again, although the FCA’s double-cost cap ensures it won’t exceed £200. This still represents a very expensive way to borrow compared to alternatives like credit unions or bank overdrafts.
Comparing Payday Lenders
Even with regulations in place, interest rates can vary slightly between lenders. Some advertise lower daily rates or offer flexible repayment options. This is where doing your research pays off. Platforms that compare lenders, such as those highlighting best payday loans uk , can be useful for identifying companies that are both regulated and transparent about costs.
In my own experience, borrowers who take the time to compare options often find more manageable repayment terms, even within the payday loan market. The cheapest option is rarely the one advertised first—it usually requires a bit of digging.
Why APR Can Be Misleading
Many people find APR confusing when applied to payday loans. The figure is designed to show the annual cost of borrowing, but payday loans aren’t meant to last a year. That’s why APRs can look astronomical, even if you only borrow for a couple of weeks.
For instance, an APR of 1,200% might sound absurd, but if you borrow £100 for 14 days, you’re only paying £11.20 in interest. The challenge comes if you can’t repay on time. What starts as a small short-term loan can quickly become a much bigger financial burden.
Safer Alternatives to Consider
While payday loans have their place for emergencies, it’s worth exploring alternatives before committing. Credit unions often offer small loans at much lower interest rates. Some employers provide salary advances, and banks may extend short-term overdraft facilities.
I’ve spoken with borrowers who avoided payday loans by negotiating payment extensions with utility companies or landlords. These conversations aren’t always comfortable, but they’re often cheaper than taking out a payday loan.
Final Thoughts
So how much interest do payday loans in the UK charge? The simple answer is up to 0.8% per day, with a total cost cap of double the amount borrowed. While this regulatory framework has improved borrower protection, payday loans remain one of the most expensive forms of credit.
If you’re considering one, go in with full awareness of the costs, plan your repayment carefully, and use comparison tools to identify the most reputable lenders. Documentation and transparency exist to protect you, not slow you down. And remember—borrowing should always be a last resort when no cheaper or safer alternatives are available.
