Payday loans have been around for a few decades in the UK, though they’ve evolved a fair bit since they first joined the lending market. These days, payday loans are almost exclusively online, which means you can apply within minutes and access the funds the same day if you are approved. This makes them an easy and quick loan to help you out if you need to borrow cash quickly to meet an emergency expense.

While payday loans have been around for a while, there can still be some confusion about why they are helpful because they are a form of high cost credit. This means they have a high interest rate and are not the cheapest way to borrow. However, this doesn’t necessarily make payday loans unaffordable and for a lot of people — who unfortunately have a poor credit history, for example — the only way they can borrow is by using payday loans, because they have been excluded from mainstream or low interest credit options.

What is a payday loan?

A payday loan is a way to borrow a small amount of money for a short period of time. Usually, you can’t borrow more than £1000, though this does vary between payday lenders. At, for example, the maximum loan amount is £750. You can borrow a payday loan for up to 12 months, though commonly people borrow for between 3 months and 6 months. A payday loan which is repaid in instalments over several months is often known as an instalment loan.

The loans accrue interest during your loan term which means you have to repay the loan principal (the amount you borrowed) and interest on your repayment dates, but the repayment amounts will often be stated on the lender’s website before you start your application so you can see exactly how much the loan is going to cost. There aren’t usually any other associated costs with payday loans, though you might be charged a default fee if you miss any of your repayments.

What can I use a payday loan for?

There are various uses for payday loans, and commonly people might take out a payday loan to:

  • finance emergency car tyres after a tyre bursts on the way to work
  • pay for repairs for a washing machine if it suddenly breaks
  • buy a train season ticket for a new job when you haven’t received your first paycheck yet

Payday loans are designed to help with emergency costs and unexpected cashflow shortfalls. They aren’t for financing holidays or buying new clothes. These are considered luxury purchases and you should avoid using credit — especially high cost credit — whenever it comes to non-essential expenditure. Instead, you should be saving up in advance, so you don’t need to borrow at all. This way, you won’t end up repaying interest for payments that could have waited a few weeks or months.

Why do payday loans help?

Payday loans can help because they can ease the immediate financial pressure that results from unexpected payments. If you are suddenly faced with a bill that’s higher than you thought, or a cost you hadn’t factored into your budget which can’t go unpaid, trying to manage the cashflow without access to credit can be stressful. It might mean missing other priority bills or compromising on your food or utility costs, resulting in arrears further down the line.

If the issue is not long-term affordability, but immediate recovery of cashflow, then a payday loan could help you out, especially if you have bad credit. This is because payday loans are high acceptance loans and lenders are unlikely to decline customers based on their credit score alone. Instead, they use an algorithm and look at your affordability as well as creditworthiness to determine whether you would be able to afford the repayments. Some lenders, including, may even use alternative credit reference agencies who can perform Open Banking checks (with your consent) to get a fuller picture of your finances, rather than relying on sometimes out-of-date information represented in your credit file.

Ultimately, a payday loan is somewhat like any other type of loan, but they’re designed to help with small cashflow requirements, rather than life event changes or day to day expenses. If you find you’re becoming reliant on payday loans — or any type of credit — you may need to seek financial advice as you’re unlikely to resolve your money issues by continuing to borrow. Borrowing is only responsible when you can afford the repayments and when you have fully considered your current and future financial commitments. While it can be easy in the moment to forget to weigh up these factors, it’s important you don’t borrow when it could land you in further financial difficulty. Not only could this cause you increased stress and anxiety, missed payments reflect negatively on your credit file making credit harder to obtain in the future.

Instead, consider talking to a free debt advice charity as we mentioned above, or try some of our budgeting tips in case you can improve your financial circumstances by making a few budget changes. Sometimes it’s not super clear how you are mismanaging or wasting your money — and oftentimes it’s not your fault: they don’t teach money management in school so improving your financial literacy is a self-taught job.

While payday loans can help, they can also be a hindrance if you’re not in the right place financially or mentally to use them. They are useful for people with restricted access to mainstream credit and those who just need to borrow a little bit of cash until their next payday. While lenders must act responsibly in checking your affordability, you must also act as a responsible borrower and only apply for a payday loan if you really need it and if you know you can afford the repayments.