A payday or pay cheque loan is a short-term, high interest, unsecured loan. It must be repaid by the time you receive your next regular pay cheque, usually within 30 days of the loan being made. Online companies and high street loan shops offer payday loans.

Borrowing from a payday lender

People who cannot borrow money elsewhere often use payday loans to deal with an emergency or unexpected cash flow problem.

The loan amount might be small, perhaps only a few hundred pounds, but you must repay the full loan amount by a certain date which is usually your next payday.

Before you arrange a payday loan, make sure you know the interest rate charged and the financial penalties for falling behind with your repayments. If you can’t repay in time your loan rolls over, your debt increases and you could get into financial difficulty.

Repaying the loan

To make sure you repay the loan in time, the payday lender will arrange that you do one of the following:

• set up a direct debit or a continuous payment authority (CPA) with your bank account
• post-date a cheque which they cash on the date the repayment is due

A continuous payment authority (CPA), sometimes known as 'recurring payments',  is slightly different than a direct debit. It doesn't have the same guarantee.

What the law says about payday lenders

There are legal restrictions on how payday lenders can work:

• there is a total cost cap of 100 per cent on payday loans - this means you will never have to pay more than twice the amount that you borrowed
• default fees (the amount you can be charged if you do not pay back the loan on time) are capped at £15.00
• interest rates and fees charged must not exceed 0.8 per cent per day of the amount borrowed
• the loan must not be extended (rolled over) more than twice
• a CPA must not be used more than twice to recover money from your bank account

Also, a payday lender must:

• be authorised by the Financial Conduct Authority (FCA) which publishes a list of licensed lenders on the FCA register.
• tell you what their APR is before you sign a loan agreement
• check your credit worthiness before they provide a loan, roll over a loan or increase the amount of credit
• satisfy themselves that you can afford the repayments
• give you written information and a copy of the contract you have signed

Before you arrange a payday loan

Make sure you can afford to repay the debt in full when it’s due. If you miss a payment, interest and charges will be added.

If you are considering using a payday loan company, don’t sign a payday lending agreement until you have tried to borrow money elsewhere:

• check to see if help is available from government
• speak to your bank about an agreed overdraft but remember to ask the bank to give you a good deal on rates and to find out what the total overdraft costs will be before you borrow because a bank can charge a set-up fee, interest on the overdraft and other fees
• check if your local credit union can help
• don't borrow from an unauthorised moneylender, also known as a loan shark

Taking a payday loan

If you have no choice other than a payday loan make sure:

• you understand the costs and charges involved as rates higher than 1,000 per cent APR are common
• you do not borrow more than you can repay or for longer than necessary because if you miss the repayment, the cost of borrowing even a small amount can quickly increase
• the lender is authorised by the Financial Conduct Authority (FCA)

If you rely regularly on payday loans, you should look at your household budget. Use the Home Budget Planner on the Consumer Council’s website.

Complain about a payday lender

If you feel that a payday lender has acted unreasonably, you should complain to them first to see if they can resolve your complaint.

If you aren’t satisfied with their response, you can contact the Financial Ombudsman Service which gives consumers a free independent service for resolving disputes with financial businesses.