Payday loans are just about the most expensive way to borrow money. Find out how much a payday loan will typically cost you to help you decide if it's worth it.

Disclaimer: Comparisons in this article are based on publicly available information believed accurate at the time of publication and may change without notice. Please confirm current details with the relevant providers before deciding. All trademarks are the property of their respective owners.

Average Payday Loan APR

According to the FCA in 2019, the average APR charged for payday loans used to be around 1,250%.

To protect consumers from the high cost of payday loans, the FCA has capped the interest and fees on high-cost short-term credit loans to a max of 0.8% per day. And the total cost cap is 100%, which means that borrowers must never have to pay back more in fees and interest than the amount borrowed.

While at first glance 0.8% might not sound like a lot, and we might feel some initial relief that the rate has been capped by the FCA, interest charges are still VERY HIGH on short-term high-cost lending like payday loans. Consider that 0.8% per day is approximately 27% for just one month (on par with what a typical credit card charges per year).

Here's that math: 1.008^30 - 1 = 27% interest for 30 days.

Pay this 0.8% rate for three months, and you owe exactly double what you borrowed (1.008^90 - 1) = 100% of interest charges.

Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk

Compare the average payloan loan APR of ~27% per month to the average credit card APR of ~25% per year.

There are variations in the APR depending on specifics of any loan. For example, loans which are repaid in instalments over a period of time typically have lower APRs than single instalment payday loans (where you don't pay anything until the end).

Payday Loan Example

The cost of a payday loan will typically depend on the amount you borrow, the interest rate and the amount of time you borrow the money. Below, we've calculated the amount you'd repay if you borrow £100, £250 and £500 for the maximum interest rate that can be charged (0.8% per day) and various amounts of time (30 days, 60 days and 90 days).

The figures include both the repayment of the amount borrowed and the interest owed. For example, borrowing £100 for 60 days means interest charges of £100 * ((1.008)^60 - 1) = £61 - so the amount repaid at 60 days would be £161 (the original £100 borrowed + £61 in interest charges).

Note: most payday loans do charge the maximum interest rate of 0.8% per day.

Plus any fees!

This example assumes you never miss a payment and don't incur any late payment fees - doing so would increase the cost of borrowing via a payday loan even more.

Payday Loan Price Capping

In 2015 a price cap was introduced that limits the amount repaid by the borrower (including all charges) to twice the amount borrowed. Following the introduction of rules to cap HCSTC loan charges, all firms must ensure that:

• Interest and fees can't exceed 0.8% per day of the amount borrowed

• Default fees can be no more than £15

• Borrowers won't pay more in fees and interest than 100% of what they borrowed

How Much do Borrowers Typically Pay for a Payday Loan?

The Financial Conduct Authority (FCA) has found that borrowers typically repay 1.65 times the amount they borrow.

Other Costs of Payday Loans

If you miss a payment on a payday loan, you can be charged up to £15. These fees can significantly add to the overall cost of a payday loan, especially if you miss more than one payment.

One long-term, unexpected cost of payday loans is the effect one can have on your credit report. When you apply for credit, lenders look at your credit report to gain an understanding of how risky it would be to lend money to you. They use your credit history to help them decide if they should lend money to you, and at what price.

Each time you apply for credit, a mark is made on this credit report. Unfortunately, payday loan applications are noted under a separate section so lenders can see how often you've applied for a payday loan, and for how much. The more you've borrowed via payday loans, the riskier your profile will be to potential lenders. If they decide to lend to you, they may charge a higher interest rate to reflect the perceived risk. As a result, using payday loans can cost you in the long term by making future household borrowing more expensive. For example, using payday loans could impact your ability to get a mortgage in the future.

ClearScore is a credit broker, not a lender

FAQs

Can I get a payday loan with bad credit?

There are companies that provide payday loans for people with bad credit. Payday loans are capped in terms of how much they can charge, but you'll probably be offered quite a small loan if you have bad credit.

Will a payday loan affect my credit score?

According to ClearScore, a payday loan is an expensive and risky way to borrow money. And, obviously, not paying the loan back in full or on time is likely to have a negative credit score impact.

How do payday loans work?

Payday loans are short-term, high-interest loans for smaller amounts of money.