What is a payday loan?
A payday loan is a small loan, usually for a few hundred pounds, borrowed for a short time and traditionally repaid in a single lump sum on your next payday. Today many short term lenders instead let you repay over a few months in instalments, which is usually more manageable.
Payday loans and many other high cost short term loans fall within the FCA's high cost short term credit rules. That is an honest description: measured as an annual rate, they are among the most expensive ways to borrow. The good news is that strict rules now cap what you can be charged.
The cap that limits what you pay
Since 2015 the Financial Conduct Authority has capped the cost of high cost short term credit. These rules changed the market completely and protect you from runaway charges:
The total cost cap is the one to remember. However the interest and fees add up, you can never be required to repay more than 100% of what you borrowed on top of the amount itself. Borrow £200 and you will never repay more than £400 in total.
How payday loans work
You borrow a small amount and agree when and how to repay it, either in one payment or over a few months. If you are approved, the money is usually paid out quickly, often the same day, subject to affordability and credit checks and whether your bank supports Faster Payments. Otherwise funds may take 24 to 48 hours to arrive. Repayments are typically collected automatically from your debit card or by direct debit on the agreed dates.
Because the APR looks very high, it helps to focus on the pounds and pence: the actual amount you will repay, shown in full before you agree.
Why the APR looks so high
APR is an annual figure. A payday loan lasts for a short period rather than a year, so its short-term charge becomes a much larger percentage when expressed annually. A £100 loan for one month can display a very high APR because APR expresses the cost annually. Always check the actual charge and total amount repayable.
For a very short loan, the total amount repayable shows the cash cost, while APR helps you compare the price of credit. Consider both before deciding.
Lower cost alternatives to check first
Before taking a payday loan, it is worth seeing whether a cheaper option fits your situation:
- A credit union: community lenders that offer small loans at capped, generally lower rates.
- An instalment loan over a few months: spreading a small amount over a short term can be more manageable than a single lump sum.
- A Budgeting Advance: if you claim Universal Credit, an interest free advance may be available.
- Talking to whoever you owe: suppliers and councils often have hardship schemes and payment plans.
How Dot Dot Loans fits in
We are a credit broker, not a payday lender. We search our panel of FCA authorised lenders and brokers for a potential match, and many offer short term borrowing repaid in instalments rather than a single payday lump sum. We only ever conduct a soft search when finding a loan for you, and we never charge you a fee.
Being matched is not a guarantee of approval, because the lender always makes the final decision. If a short term loan is not the right fit, the alternatives above may serve you better.
Borrowing responsibly
High cost credit should be a considered choice, not a habit. Only borrow what you genuinely need, be sure you can repay on the agreed dates, and never take a new loan to repay an old one. Repeatedly relying on short term credit is usually a sign that free debt help would make a bigger difference.
Free and impartial guidance is available from MoneyHelper, and free debt advice from StepChange.
Sources and methodology
Every figure in this guide is drawn from an official or independent authority, listed below. We do not link to other lenders or brokers. Where a statistic could change, we note when we last checked it, in July 2026.
Methodology: this guide is written in house by the Dot Dot Loans editorial team and reviewed by Paul Gillooly, Director of Dot Dot Loans, using published rules from the Financial Conduct Authority and figures from the sources above. It is general information, not financial advice. Representative Example: Borrow £1,000 over 18 months. 18 monthly repayments of £89.22. Total amount repayable: £1,605.96. Interest: £605.96. Annual interest rate: 59.97% (fixed). Subject to application approval by the lender. Not all lenders offer loans up to £5,000. Representative APR 79.5% (Variable). Any representative monthly repayment shown is for illustration only, based on our representative APR. Your actual repayments will be confirmed by the matching lender if your application is approved.