Payday loans are just about the most expensive way to borrow money. Find out how much a payday loan will typically cost you to help you decide if it's worth it.
Cost of a Payday Loan
The cost of a payday loan will typically depend on the amount you borrow, the interest rate and the amount of time you borrow the money. Below, we've calculated the amount it might cost you to borrow £100, £250 and £500 for the maximum interest rate that can be charged (0.8% per day) and various amounts of time (30 days, 60 days and 90 days). Note: most payday loans charge the maximum interest rate of 0.8% per day. Also, these amounts assume you never miss a payment and don't incur any late payment fees.
Amount you'll repay on payday loans charging 0.8% interest/day
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In 2015 a price cap was introduced that limits the amount repaid by the borrower (including all charges) to twice the amount borrowed.
How Much do Borrowers Typically Pay for a Payday Loan?
The Financial Conduct Authority (FCA) has found that borrowers typically repay 1.65 times the amount they borrow. The average amount of money borrowed in 2018 was £250; the average amount payable was £413 (1.65 times the average amount borrowed).
|Amount Borrowed||Typical Amount Repaid|
Average Payday Loan APR
According to the FCA, the average APR charged for payday loans has been around 1,250%—which is essentially the maximum interest rate of 0.8% per day. There are variations in the APR depending on specifics of any loan. For example, loans which are repaid in instalments over a period of time typically have lower APRs than single instalment payday loans (where you don't pay anything until the end).
Payday Loan Price Capping
Following the introduction of rules to cap HCSTC loan charges, all firms must ensure that:
- Interest and fees charged must not exceed 0.8% per day of the amount borrowed
- If borrowers default, fees must not exceed £15
- Borrowers must never pay more in fees and interest than 100% of what they borrowed
Other Costs of Payday Loans
If you miss a payment on a payday loan, you can be charged up to £15. These fees can significantly add to the overall cost of a payday loan, especially if you miss more than one payment.
One long-term, unexpected cost of payday loans is the effect one can have on your credit report. When you apply for credit, lenders look at your credit report to gain an understanding of how risky it would be to lend money to you. They use your credit history to help them decide if they should lend money to you, and at what price.
Each time you apply for credit, a mark is made on this credit report. Unfortunately, payday loan applications are noted under a separate section so lenders can see how often you've applied for a payday loan, and for how much. The more you've borrowed via payday loans, the riskier your profile will be to potential lenders. If they decide to lend to you, they may charge a higher interest rate to reflect the perceived risk. As a result, using payday loans can cost you in the long term by making future household borrowing more expensive. For example, using payday loans could impact your ability to get a mortgage in the future.