Payday loans vs. Short-term loans

If you’re facing an unexpected expense and looking at quick loan options, you'll often see the terms "payday loan" and "short-term loan" used everywhere. It’s easy to feel confused because they sound similar, but in reality, the products can be fundamentally different – especially in how you pay the money back.

A payday loan is traditionally a very small amount of money borrowed for a very short period (usually 7 to 31 days) that you pay back in one single lump sum on your next payday. A short-term loan is a much broader term, covering products that typically offer more flexible repayment schedules, letting you spread the cost over several weeks or months.

To help clear up any confusion and explore your best options, we’ll walk you through the key differences between a traditional payday loan and a flexible short-term loan. You can find out more about how our short-term loans work on our short-term loans hub.

Why comparing matters

Understanding how different loan types work helps you choose one that fits your budget, avoids unnecessary fees, and keeps repayments manageable.

Without taking a moment to compare payday loans and short-term loans, you could unintentionally commit to a loan where the repayment date hits too quickly, putting unnecessary strain on your next pay check.

Taking the time to compare empowers you to make an informed choice that prioritises your long-term financial health, not just the fastest funding.

Why the confusion? The 'Hoover effect'

Despite the clear distinction in how they're paid back, many people still use the term 'payday loan' when they’re actually looking for a modern short-term instalment loan. It’s a bit like saying “Hoover” for any vacuum – a brand name that became shorthand for the whole category.

Today, when people search for "payday loans," they’re usually looking for the speed and accessibility of a short-term product, but with the flexibility and repayment structure of a modern short-term instalment loan – which is exactly what we provide as a responsible lender.

Deep dive: The fundamental difference

The most important distinction between a traditional payday loan and a flexible short-term loan is the repayment structure. This one difference can have a huge impact on your budget and financial stress.

A flexible short-term loan, often structured as an instalment loan, allows you to manage the cost without having to find all the money in one go. This helps reduce the risk of falling into a cycle of debt, which is a key principle of responsible lending.

Benefits and considerations

Both short-term and payday loan loan options share the benefit of speed, providing funds quickly to cover an unexpected expense. However, when you compare your options, short-term loans benefit from being able to repay over a longer amount of time and with greater flexibility of monthly or weekly repayments.

The power of flexibility

Repaying over instalments is nearly always better for your cash flow. For example, if you use a payday loan to borrow £400, you may only have a few weeks before you have to repay the full amount plus interest. Using a short-term loan to split that repayment into four or five smaller, predictable payments makes it manageable alongside your existing bills and commitments.

Unlike old-style payday loans, flexible short-term instalment loans show the total cost upfront, including daily interest and full repayment breakdowns, so you always know exactly what you'll repay.

Considerations before you borrow

No matter what type of short-term payday loan you consider, it’s important to be honest with yourself about affordability. We encourage you to ask:

• Can you realistically afford the repayments within your current budget, taking into account all your other expenses?
• Have you only borrowed the minimum amount you need to cover the emergency?
• Are you aware of the total cost (amount borrowed plus interest) before signing the agreement?

Borrowing should only be a tool used when you’re confident you can repay it without causing further financial strain.

Moneyboat’s approach: Why choose a direct lender

When looking to understand what is a short-term loan, it's essential to look beyond the name and check the lender’s credentials. Moneyboat is a trustworthy, FCA-authorised direct lender. This means we lend our own money and are directly regulated to follow strict rules designed to protect you.

What sets us apart? We operate on three core principles:

1. Transparency: We’re clear about the cost up front, with no hidden fees, ever.
2. Responsibility: We conduct thorough affordability checks to ensure our loans are the right fit for your circumstances. If we think a loan could put you at risk, we will not approve it.
3. Support: Our UK-based customer support team is made up of real people trained to help in any situation.

So what’s right for you?

While many people still search for what’s a payday loan, what they usually need is the flexibility and lower financial shock of a modern short-term instalment loan. The fundamental difference lies in the repayment structure: one demands the full amount back in a single lump sum, the other lets you repay in manageable instalments over time.

Before you make any decision to borrow, please take the time to explore all your options.

If you’re worried about your finances, help is always available.

If you’re struggling financially or simply unsure where to turn next, the following free and independent support organisations are on hand to help:

• MoneyHelper: A government service offering free, impartial financial advice.
• National Debtline: Independent debt advice by phone or online web chat.
• StepChange: A charity offering specialised advice on everything from debt solutions to budgeting help.
• Citizensadvice.org.uk: Free, confidential help with debt, housing, and more.