Why Are Payday Loans So Expensive?

Last updated on September 2nd, 2026 at 02:34 pm

Payday loans are considered expensive because they are short term products, are unsecured (no security) and are offered to borrowers with fair and bad credit. 

Therefore, the rates charged for payday loans might seem higher than traditional credit cards and personal loans. However, the rates of 0.8% per day or 1,000% APR are designed to manage the risk of lending to people with limited security and adverse credit histories, while adjusting the rate for bad debt and missed payments.

There is a price cap in the payday loans industry which forbids lenders charging more than 0.8% per day and limiting default rates to a maximum of £15.

However, there are cheaper alternatives available such as using a 0% credit card, borrowing from a credit union or from family and family.

Key Takeaways

• Payday loans are expensive to manage a high risk of default – whilst lenders are able to lend to people with all credit histories and not take any security or collateral
• The payday loans industry has price caps in place so that rates are capped at 0.8% per day and you never pay double the amount you borrow
• Cheaper alternatives are available such as borrowing from family and friends, using a 0% credit card, paying your credit card on time or borrowing money from a credit union

Why Is The APR For Payday Loans So High?

The APR for payday loans might be around 500% or 1,200% APR and this is a lot higher than other financial products like personal loans (7% to 36%) and credit cards (24% to 30%).

The high APR is a reflection of the annualisation of the product. Whilst typical payday loans may only last 3 to 6 months, to make it an APR, the calculation is compounded as if the product was taken out for a year. 

This makes it easy to use APR and compare the price of payday loans against other financial products, but the actual APR for payday loans is compounded over and over, even though it would rarely be taken out for a year.

What Things Make Payday Loans More Expensive?

Unsecured
Payday loans are unsecured, meaning you do not need to provide an asset, such as a house or car, as security. Since the lender has less protection if you do not repay, they charge higher interest rates to cover the extra risk.

All credit histories considered
Payday lenders may accept people with poor or limited credit histories. Since they lend to borrowers who may be seen as higher risk, they often charge higher interest rates to compensate for the increased chance of missed payments. See loans for people with bad credit.

Bad debt and high default rates
Around 20% to 30% of payday loan customers struggle to repay their loans, leading to high default rates for lenders. The cost of these unpaid or late loans is reflected in the higher charges and interest rates paid by borrowers.

Short-term products
Payday loans are designed to be repaid over a short period of around 3-6 months. Although the amount borrowed may be small, the fees and interest can be high compared with the length of the loan, making them expensive if the borrower needs to extend or roll over the loan.

Fast turnaround
Payday loans can often be arranged and paid into a borrower’s account very quickly, such as the same day (see same day loans) or within 24 hours. This convenience comes at a cost, as lenders charge higher rates for providing quick access to money with limited application and processing time.

How Do Payday Loans Costs Compare To Other Loan Products?

Borrowing type	Daily rate*	APR / equivalent	Loan amount	Monthly repayment	Full amount repaid
Payday loan	0.80%	600-1200%	£500	£147.00	£850-993
Personal loan	0.021%	8.0%	£500	£85.22	£511.32
Credit card	0.061%	24.9%	£500	£88.87	£533.23
Secured loan	0.021%	8.0%	£500	£85.22	£511.32
Credit union	0.097%	42.6%	£500	£92.30	£553.79

What Regulations Are In Place To Limit The Cost of Payday Loans?

According to FCA regulations, there are price caps in place to limit the cost of payday loans that lenders can charge to:

• 0.8% per day
• Default fee of £15 
• Borrowers will never pay back more than 100% of the original loan

What Cheaper Alternatives Are There For Payday Loans?

A 0% credit card can allow you to borrow money without paying interest for a set introductory period such as up to 30 months . This can be much cheaper than a payday loan, as long as you make the required payments and clear the balance before the 0% period ends.

Similarly, using a credit card can be cheaper than a payday loan if you pay the balance in full by the due date. You can avoid paying interest altogether, although you need to make sure you can afford to repay what you spend.

Borrowing from friends or family can be a cheaper alternative because they may not charge interest or fees. However, it is important to agree clearly when and how the money will be repaid to avoid causing problems in the relationship.

Finally, credit unions are not-for-profit organisations that offer loans, often at lower interest rates than payday lenders. They can be a good option for people who may struggle to get cheaper credit elsewhere. 

You normally need to become a member and be part of the local area of the credit union – since they serve the local community. It may take a few days or weeks to borrow money, but the rates are very affordable at 36% APR and no late fees if you miss payments.