Borrowing money isn’t as new as some people might think – the first overdraft was founded in the 1700s, and people probably borrowed informally long before then. However, the types of credit we commonly think of today have only really been round in the last few decades. Payday loans were first established in the US in the 1980s, and they soon came to the UK after that. While the concept is now a few decades old, modern payday loans are quite different. The development of technology, especially in the financial sector, means payday lenders are mostly found online with simple application forms and quick loan decisions. Instead of waiting hours or even days for someone to manually check your application, automated algorithms mean this process can take just seconds. If you have an emergency expense, you can get access to funds the same day if your application is approved, relieving stress and resolving cashflow issues quickly.

Payday Loan Interest Rates

Payday loans are a type of credit, which means you are charged interest for your borrowing. They also have a high interest rate, because of their short term nature and the small amounts you borrow. Instead of borrowing thousands from a bank over several years, payday loans are often just in the hundreds of pounds and loan terms are no longer than twelve months.

Bad Credit Loans

Payday loans also cater to a much wider demographic than most mainstream borrowing options. If you have bad credit, for example, you won’t see yourself immediately declined when applying for a payday loan. While lenders still conduct affordability and creditworthiness assessments, they have higher acceptance rates for people with a poor credit history. This is partly because having bad credit doesn’t mean you never need to borrow – or that you don’t face the same cashflow issues that people with good credit face. You could be rebuilding your credit file or simply starting out on your credit building journey, but being financially excluded from credit can make general money management quite difficult.

Instalment Loans

Instalment loans, or Multi Month Loans at, are the same as payday loans but with more than one repayment date. You still apply for the loans online, and the loan decisions remain almost instant, but instead of repaying the loan in one lump sum, you repay over several months. Some people find the smaller individual repayments easier to manage alongside their regular financial commitments. Instalment loans do cost more overall, because you are borrowing for a longer term, so it’s important to consider your financial circumstances – both present and future – to decide whether a payday loan or a Multi Month Loan would be better for you.

Definition of a Payday Loan

To put it simply: a payday loan is a form of high cost short term credit. The APR is over 100% and you can’t borrow for more than 12 months. The per annum interest rate is capped at 292%, which works out to 80p per day per £100 you borrow, and all payday lenders are regulated by the Financial Conduct Authority. Some payday loans have multiple repayment dates which split the cost of the loan over several months.

Most payday lenders only lend less than £1000 and offer 24/7 online applications. You have to repay the loan principal and the interest on your repayment dates and missing your repayments can cause serious money problems.

Improving your Credit Score

There are alternative borrowing options available if a payday loan doesn’t seem right for you, including credit lines and high interest credit cards. But if you’re looking at payday loans because you have bad credit, you might want to consider how you can improve your credit file. Some things take minutes – like signing up to the electoral register – and others may take a few months or years. Slowly, by making all of your repayments on time and meeting your financial commitments without delay, you should see your credit score start to improve.

Important Notes about Payday Loans

While easy to access, payday loans should only be used for emergency situations where not borrowing the money would land you in a worse financial difficulty. Payday loans are an expensive way to borrow so they shouldn’t really be used for general cashflow management or regular shortfalls in your income. They are not a secondary source of income and using payday loans irresponsibly could land you in a lot of debt. Always consider your current and future financial circumstances before submitting an application and think about whether you really need to borrow. Although the credit is available quickly, this isn’t the only justification you should have for applying.