Payday loan cost guide

Like most types of credit, when you take out a payday loan, you commit to repaying the amount borrowed plus interest. Some may also charge extra fees or costs for repaying early. But how much does this all cost?

Whether you need to pay off an urgent home repair or a surprise bill, payday loans can help relieve temporary financial hurdles. As with all forms of credit, It’s important to know what to expect before borrowing online and understand the full cost before you commit.

Read on as we explore the factors that impact the cost of a payday loan. We’ll explain how daily interest works, and break down different payday loan cost examples to help give you a clearer picture.

In this guide:

• How much is a payday loan?
• How much can payday loans charge?
• Payday loan cost example
• Helpful guides and resources

How much is a payday loan?

The cost of a payday loan can vary based on a range of factors, including:

1. Daily interest rate

The daily interest rate is the percentage of the loan amount you will be repaying each day that you have an outstanding balance. Although the interest rate might be displayed as a daily percentage, the daily interest will be multiplied by the number of days that have passed since your last repayment. You’ll then be charged the cumulative interest for that period.

Payday loans will also have an APR (Annual Percentage Rate). However, this shows the total cost of a loan as represented over a year. In most cases, borrowers will take out payday loans for as little as one month, or up to six months, so your daily interest rate is the most relevant factor here.

2. Loan amount

Naturally, the size of the loan will impact the cost. As we explained earlier, not only will you repay the amount borrowed in monthly instalments, but you’ll also pay the daily interest on top.

Your interest rate will stay the same whether you borrow £500 or £700 – but you’ll pay more interest on a £700 loan because you borrowed more money.

3. Loan length

Short-term loans allow you to spread the cost of borrowing over several months, if you wish. This means you could pay it back in a month, or up to six months, depending on the lender. However, when you repay a loan over a longer period, though your repayments may be split into smaller instalments, you’ll pay more interest overall.

This is why paying back your loan quickly can be a higher upfront cost but save you more money in the long run.

It’s important to weigh up the potential benefits and considerations of repaying early compared to over several months. For instance, it could be more affordable for you to stretch out the cost, even if you pay more interest overall. Understanding how it can make a difference and knowing which option suits your budget is the best way to stay in control.

4. Additional fees and charges

There are various fees and charges that may apply to short-term, payday loans. Responsible lenders will be direct and upfront about what charges apply, which may include:

• Late repayment fees
• Application fees
• Early repayment fees
• Arrangement fees
• Admin fees

The amount you’ll be charged for late repayments, or if you fail to pay, will be set out in your credit agreement. Always make sure you understand what you might be asked to pay if you miss a payment.

Late payment fees can mount up quickly if you regularly miss your repayments. What’s more, missed repayments will negatively impact your credit score, too.

Remember – all interest and charges should be set out in your credit agreement, so make sure to read this carefully before signing. Interest rates can’t be increased during your loan period, and charges can’t be introduced after you’ve signed the agreement.

5. Eligibility

Factors like your income, employment status, and credit history can impact the terms and rates you’re offered as a borrower. For instance, if you have a lower credit score, you may be considered a higher borrowing risk and therefore be offered a higher interest rate.

Explore our payday loan eligibility guide for more insights on short-term borrowing criteria.

How much can payday loans charge?

The maximum daily interest rate you can be charged in the UK is 0.8%. Some direct lenders choose to offer better deals. For example, a short-term loan from Moneyboat has a daily interest rate of just 0.79%.

In addition to the cap on daily interest charges, the Financial Conduct Authority (FCA) also imposed a cap on the total cost of a short-term loan. Now, regardless of how long you take to repay your loan, or how many repayments you miss, you’ll never pay more than double the cost of your initial loan.

So, for a £200 loan, the loan can only ever cost you a further £200 in interest and charges – so £400 in total, including the repayments themselves.

Payday loan cost example

Here’s an example of how much your short-term, payday loan could cost based on the last working day of each month.

Representative Example: Borrow £400 for 4 months: 3 monthly repayments of £156.09 followed by a final repayment of £156.07. Total repayment £624.34. Interest rate p.a. (fixed) 288.35%. Representative 1,267.9% APR.

Find out more about our financial promotions and Annual Percentage Rates (APR).

Warning: Late repayments can cause you serious money problems. For help, go to MoneyHelper.

Explore your options with our helpful guides and resources

There are various common uses for payday loans. Perhaps your boiler needs fixing urgently and it’s too close to payday to make your budget stretch. Or maybe you’ve got a surprise bill that you don’t want to reach into your savings for right now.

When you’re looking for an urgent credit solution, it’s important to compare your options. When used responsibly, short-term payday loans can help offer you more choice if you’re still improving your credit report. However, payday loans might not be the right choice for everyone, so it’s a good idea to consider payday loan alternatives that could save you from borrowing more money, or paying more interest than you need to.

If you’re not sure where to turn, help is always available. Remember, you can reach out to third-party support organisations for confidential financial advice, including:

• Citizens Advice
• StepChange
• MoneyHelper