The basics
What are payday loans and how do they work in the UK?
The full journey, from the expense that starts it to the final repayment.
Written by the UKPayday editorial team
Updated 27 July 2026
13 min read
The short version
- A payday loan is small, unsecured, short term borrowing.
- Many are now repaid in monthly instalments, not one payment.
- The price cap limits qualifying loans to 100% of the amount borrowed.
- Approval is never guaranteed and never automatic.
A payday loan is a form of unsecured borrowing designed to provide a relatively small amount of money for a short period.
The original idea was simple. You borrowed money to cover an urgent cost and repaid it when your next wage arrived. That is where the name came from.
The market has changed. Some loans are still repaid in one payment, but many are now divided into monthly instalments. The term payday loan is therefore often used more broadly for short term, higher cost personal loans.
Whatever name is used, the important details are the amount borrowed, the repayment term, the APR, the individual payments and the total amount repayable.
The name does not define every loan
People often use payday loan to describe any small loan available relatively quickly. The official regulatory definition is more precise.
The Financial Conduct Authority uses the term high cost short term credit for certain unsecured loans with an APR of at least 100 percent and a maximum term of 12 months. There are exclusions for some other credit products.
A loan marketed alongside payday loans may not fall within this definition if it has a longer term or different product structure.
This matters because the FCA price cap for high cost short term credit applies only to qualifying agreements. You should check the actual lender, product type and agreement rather than relying on the name used in an advert or search result.
UKPayday can search for loans from £100 to £2,500 with terms from 3 to 36 months. Not every participating lender offers every amount or term. Some offers found through the service may be instalment loans rather than traditional payday loans.
Follow a loan request from beginning to end
The easiest way to understand payday lending is to follow the process in the order it happens.
First comes the expense
Someone normally considers a payday loan because a cost has arrived before they have enough money available.
It could be an urgent repair, essential travel, a household item or another unexpected expense.
Before applying, the customer needs to decide how much is actually required. Borrowing extra increases the balance and usually increases the interest paid.
It is also worth checking whether the expense can be delayed, divided into smaller payments or covered through insurance, benefits, savings or local support.
Our guide Alternatives worth checking first explains the main options that can be considered before using credit.
Then comes the search
A customer can approach a lender directly or use a credit broker.
A lender provides the money and enters into the credit agreement. A broker searches or introduces customers to lenders and other brokers.
UKPayday is a credit broker. It does not lend money.
When someone submits details through UKPayday, the service searches a panel of participating lenders and brokers. It does not search every lender in the UK.
The eligibility stage uses a soft credit search. This does not affect the customer's credit score and is not shown to other lenders as a credit application.
A search result is not an approval. It only indicates that a participating provider may be able to consider the request.
The lender makes the decision
If a possible match is available and the customer chooses to continue, the lender completes its own checks.
These can include:
- Confirming identity and address
- Checking income
- Reviewing essential spending
- Examining existing credit commitments
- Searching the credit report
- Completing fraud prevention checks
- Deciding whether the repayments appear affordable
A lender must consider both the risk that payments will not be made and the risk that making them could cause financial difficulty.
A formal application may involve a hard credit search. This is recorded on the credit file and may affect the customer's credit score.
A poor credit history does not automatically produce the same decision from every lender. Each lender has its own criteria. However, no authorised lender can promise approval before completing the required checks.
Our guide How lenders decide, and what they look at explains this part of the process in more detail.
An offer is presented
If the lender approves the application, it provides a credit offer.
The offer should identify:
- The amount being borrowed
- The interest rate
- The APR
- The repayment amount
- The number of payments
- The payment dates
- The total charge for credit
- The total amount repayable
- Any charges that could apply
- The consequences of paying late
These figures are connected, but they answer different questions.
APR provides a standard annual measure that can help compare the cost of credit. The total amount repayable shows how much is scheduled to be paid across the agreement. The individual repayment shows what must be available on each payment date.
A lower monthly payment does not always mean a cheaper loan.
Extending the term can make each payment smaller while increasing the overall amount paid.
The customer does not have to accept the offer. Approval is permission to borrow on the terms presented, not a reason to proceed regardless of cost.
The agreement is accepted
A regulated credit agreement sets out the legal terms between the customer and lender.
Online lenders normally allow the agreement to be read and accepted electronically. The customer should download or save a copy before continuing.
The agreement needs to be read even when the money is required urgently. Important information can include the collection method, late payment process, early settlement rights and how the lender will communicate.
Once the agreement has been accepted and any final checks are complete, the lender arranges the transfer.
Some lenders can send funds quickly, but the arrival time is not guaranteed. It can depend on the lender, the customer's bank, the time of approval and whether further information is required.
UKPayday does not control the approval decision or the time at which a lender sends money.
Repayment begins
The repayment schedule depends on the agreement.
A traditional payday loan may require one payment on or around the customer's next payday. An instalment loan divides the balance and interest into several scheduled payments.
The lender might collect payments using a Direct Debit or recurring card payment. A recurring card payment is also known as a Continuous Payment Authority.
The agreement should state:
- Which account or card will be used
- How much will be collected
- The collection dates
- What happens if a payment fails
- How to change the payment method
The customer needs to keep enough money available for each payment while still covering essential costs.
If the first repayment can only be made by missing rent, using another loan or going without food, the borrowing was not affordable.
What the customer is paying for
The amount borrowed is sometimes called the principal or amount of credit.
Interest is the price charged for using that money. The lender may calculate it daily, monthly or in another way described in the agreement.
The total charge for credit is the cost of borrowing. It can include interest and relevant compulsory charges.
The total repayable combines the original amount borrowed with the total charge for credit.
For example, the structure is:
The total repayable is the clearest way to understand the expected cost in pounds. It should always be considered alongside the APR, repayment schedule and term.
Our guide APR, interest and total repayable explains each figure and how to compare offers.
The FCA price cap
Qualifying high cost short term credit is subject to a price cap.
The cap has three main parts.
First, interest and fees must not exceed 0.8 percent per day of the amount borrowed.
Second, fixed default fees must not exceed £15. Interest may continue on an unpaid balance, but it remains subject to the relevant limits.
Third, the total amount charged in interest, fees and charges cannot exceed 100 percent of the amount originally borrowed.
This means a customer with a qualifying agreement should never pay more in interest, fees and charges than the original amount of credit.
If £100 is borrowed, the combined interest, fees and charges cannot exceed a further £100. The total paid should not exceed £200.
The cap is a maximum, not a recommended price. A lender can charge less.
It also does not make every qualifying loan affordable. A payment can remain too expensive for a particular customer even when the lender complies with the cap.
The limits are explained in the FCA payday lending price cap.
Loans that do not meet the regulatory definition of high cost short term credit may be subject to different cost rules. Read the individual agreement to understand what applies.
Are payday loans secured?
Payday loans are normally unsecured.
This means the loan is not secured against a home, car or another specific asset. The lender does not obtain an automatic right to take an asset simply because the loan has not been paid.
Unsecured does not mean there are no consequences.
Late or missed payments may lead to charges, damage to the credit record, collection activity and possible court action. A court can make orders about an unpaid debt after the required legal process.
The debt remains a legal obligation even though no asset was offered as security.
Can anyone get one?
No payday lender accepts everyone.
The lender must assess the application and can decline when its criteria are not met. Reasons can include affordability concerns, identity problems, insufficient income, existing debt or information found during credit and fraud checks.
Claims such as guaranteed acceptance should be treated with caution. A genuine lender cannot know that an application will be approved before checking the customer and the proposed agreement.
An eligibility check can provide an indication, but the lender still makes the final decision.
What happens to the credit file?
Checking eligibility through a soft search does not affect the credit score.
A formal application may involve a hard search. If the loan is provided, the lender will normally report the account and payment history to one or more credit reference agencies.
Payments made on time should show that the account was managed as agreed. Late payments, arrears or a default can damage the credit history.
Even a loan repaid on time may influence a future lender's decision. Some lenders view recent or repeated payday borrowing as a sign that the customer has experienced financial pressure.
Our guide Do payday loans affect your credit score? covers the full credit journey without needing to repeat it here.
Can the loan be repaid early?
Customers can normally ask to settle a regulated loan before the final scheduled payment.
The lender can provide an early settlement figure showing the amount required on a particular date. Paying early may reduce the remaining interest, although the exact calculation depends on the agreement and applicable rules.
Do not simply add together the payments still listed on the original schedule. Ask for the lender's formal settlement figure.
Once payment is made, check that the account is closed and reported as settled.
What if a repayment cannot be made?
Contact the lender before the payment date.
Explain what has changed and provide an honest figure for what can be paid after priority bills and essential living costs.
Depending on the circumstances, the lender may consider a changed payment date, reduced payments, a temporary pause or another form of support. No particular option is guaranteed.
Do not take another payday loan simply to make the repayment.
That replaces one urgent payment with a new debt and can begin a cycle of repeated borrowing.
UKPayday cannot change a repayment arrangement because it does not manage the loan. The customer must speak to the lender named in the credit agreement.
The guide What to do if you cannot make a repayment provides a practical plan for this situation.
What a payday loan does not do
A payday loan does not increase income. It moves money from the future into the present and adds a borrowing cost.
- It does not remove the expense that caused the shortage.
- It does not guarantee that the next month will be easier.
- It is not a grant, benefit payment or wage advance.
- It is not a suitable way to build a credit score.
- It is not automatically affordable because a lender has approved it.
The customer receives money now in return for a legal commitment to repay more later.
When the product is unlikely to help
A payday loan is unlikely to solve the problem when someone needs credit to cover regular living costs every month.
Warning signs include borrowing to pay rent, using one loan to repay another, missing priority bills or depending on credit for food and energy.
These situations indicate that normal income is not covering essential spending. Adding another repayment can widen the gap.
Free debt advice may be more useful than another loan. A debt adviser can review the complete position, check benefits, identify priority bills and help communicate with creditors.
MoneyHelper provides a free debt advice locator and practical information about short term and payday loans.
Five checks before accepting an offer
Read the offer and answer five questions.
- What will reach my account?Confirm the amount being provided and whether any separate charge applies.
- What must I pay back?Look at the total repayable, not only the amount borrowed.
- When is each payment due?Check the complete repayment schedule against your income dates.
- What will be left afterwards?Deduct the repayment from your income after rent, Council Tax, energy, food, travel and existing debts.
- What happens if something changes?Read the lender's process for late payments and financial difficulty before entering the agreement.
If any answer is unclear, ask the lender before accepting.
A payday loan is a short term financial commitment, not simply a quick transfer of cash. The application, cost and repayment all matter.
Warning: Late repayment can cause you serious money problems. For help, go to MoneyHelper.
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