How Do Payday Loans Work?

If you need money to cover the cost of an unexpected expense, you might be thinking about searching for a payday loan in the UK.
How do payday loans work?
How long do you have to pay a payday loan back?
Are there any alternatives to payday loans?

In our guide to payday loans, Little Loans explains how they work, how much they cost, and whether a payday loan alternative, such as a short-term loan, could be better suited to you.

Little Loans is a credit broker. While none of the lenders we work with offer payday loans, they instead offer short-term loans with repayment terms ranging from 3 to 60 months.

What is a payday loan?

A payday loan is money that’s borrowed from a lender, typically to cover the cost of a financial emergency, and is repaid in full a month later. As well as paying back the money you’ve borrowed, you’ll also be charged interest, which will be included in your monthly repayments.

How does a payday loan work?

If you’re thinking about your borrowing options, you may have wondered, ‘how do payday loans work in the UK?’

1. If approved, the payday loan lender sends the money to your bank account.
2. You can use the money to cover your emergency expense.
3. The loan, including interest, must be repaid in full within a month.

How much does a payday loan cost?

The overall cost of a payday loan will depend on the interest rate.
The interest rate you’re offered will depend on your financial circumstances, including your credit history.
A loan with a lower interest rate will cost less.

What are the disadvantages of payday loans?

Whether a payday loan is right for you will depend on your circumstances.
If you’re confident that you’re able to repay the money you’ve borrowed in full, with interest, in one month, then a payday loan might be something to consider.
However, if you’re looking to spread the cost of a loan over several months, rather than one, a payday loan might not be your best option.

Remember, a payday loan should never be seen as a long-term financial solution, and you should never apply to borrow money that you don’t need or can’t afford to repay.

How will a payday loan affect my credit score?

Any loan will have an impact on your credit score.
When you make an application with a lender, they will complete a creditworthiness assessment, which will involve a hard search or an Open Banking check.
Applying to several lenders may lead to multiple hard credit checks, which can lower your credit score.

If you’re approved for a loan, you must make your repayments in full and on time each month. A late or missed repayment could damage your credit score.

Best payday loans UK

If you’ve done your research and believe that a payday loan could be a solution for your situation, you may think about searching for the best payday loans in the UK. Remember, no loan can be described as ‘the best’, because the loan that’s a good fit for one person isn’t always right for another.
When searching for the best payday loan, you should look for one that’s affordable for you. You should always make sure that the lender is authorised and regulated by the Financial Conduct Authority (FCA).

Where can I get a payday loan?

Payday loans are less common than they used to be.
In 2014, the FCA introduced new rules to protect customers. In the years that followed, several large payday loan firms, such as Wonga, collapsed.

Looking for Wonga Loan alternatives? Little Loans could help you search for a short-term loan.

These days, you might find that short-term loans are more widely available than payday loans.

What’s the difference between a payday loan and a short-term loan?

A short-term loan differs from a payday loan in that it offers a repayment term longer than one month. This could be useful if you’re hoping to spread the cost of borrowing.

Little Loans is a credit broker, and we work with a large panel of over 30 direct lenders.
With Little Loans, you could search for a short-term loan with a range of repayment terms between 3 and 60 months, depending on the amount of money you apply to borrow.

Payday loans vs short-term loans: how do short-term loans work in comparison to payday loans?

Short-term loans work in a very similar way to payday loans; the main difference is the repayment term. As discussed, a payday loan typically needs to be repaid within a month, while a short-term loan offers a variety of repayment options. Depending on the amount of money you apply to borrow, you could repay a short-term loan over several months or years.

Short-term loans: how much money could I apply to borrow?

With Little Loans, you can search for a short-term loan between £100 and £10,000.

Payday loan alternative: who can search for a short-term loan with Little Loans?

Searching for a loan with Little Loans will not affect your credit score.*
You can search for a short-term loan with Little Loans if you:

• Are over the age of 18;
• Are a UK resident;
• Have a UK bank account and a valid debit card; and
• Have a regular source of income paid into your bank account.

Search for a payday loan alternative with Little Loans: how does it work?

Searching for a short-term loan with Little Loans is simple. Our online form can be filled out at a time and place that suits you and should take no longer than 5 minutes to complete.

1. Once we’ve received your application, we’ll run a soft search and scan our panel of lenders for a suitable loan.


2. In just 60 seconds, we’ll let you know if you’ve been matched with a loan; if you have, you’ll be redirected to the lender’s website.


3. If you’re happy to go ahead with the loan and make a full application with the lender, they will carry out a creditworthiness assessment, which will include a hard search or an Open Banking check.


4. If the lender is happy with the outcome of the creditworthiness assessment, you’ll be offered the loan.

Is it quicker to get a payday loan or a short-term loan?

Neither type of loan is ‘quicker to get.’ The time it takes to complete and process a loan application varies by lender and always includes a full creditworthiness assessment. The lender will need to make sure any loan offer is affordable for you.

You should take your time when researching a loan to make sure it’s right for you. Using a credit broker, such as Little Loans, to search for a short-term loan could save you time. Rather than having to search and potentially apply with different lenders, Little Loans can scan over 30 direct lenders at the same time for you.

Payday vs short-term loan: how quickly could I get my money?

Every lender, whether offering payday or short-term loans, will have its own payout timescales. Some lenders, including several of those on the Little Loans panel offering short-term loans, could send your money on the same day as your application is approved.

Even if your money is sent the same day as you’re approved, it’s important to note that the time it takes for the money to become available in your account will depend on your bank’s policies and procedures.

What to do if you can’t afford to repay your payday loan

If you’re finding it difficult to repay any loan, you should contact your lender as soon as you can. They will work with you to come up with a suitable solution while you’re finding things difficult.

I need to talk to someone about money; who can I turn to?

Worried about money and debt? Please know that you can access free, confidential and impartial financial advice from StepChange, MoneyHelper, Citizens Advice, and National Debtline.

*Little Loans uses a soft credit check to search for a loan for you. A soft search will not harm your credit score; however, if you’re matched with a lender and choose to make a full application, the lender will carry out a creditworthiness assessment, including a hard search or an Open Banking check. A hard search will be visible on your credit file for up to 12 months, and multiple hard searches in a short period of time could cause your credit score to decline.