Understanding borrowing

Payday Loans Explained

What payday loans actually are, how instalment loans differ, what the real costs look like in pounds — and the alternatives worth checking before you apply for anything.

5 min read • Cash Train editorial team

What is a payday loan?

A payday loan is a very short-term cash advance — typically £100 to £1,000 — that you repay in a single lump sum on your next payday, usually within 14 to 31 days. The lender deposits the money into your current account; on the due date they withdraw the original amount plus their charge via a Continuous Payment Authority (CPA) linked to your debit card.

At their peak in the early 2010s, dozens of payday lenders operated in the UK. The market changed dramatically in 2015 when the Financial Conduct Authority introduced a price cap: interest cannot exceed 0.8% per day of the amount borrowed, and the total cost (including all fees and interest) cannot exceed 100% of the original loan. That means if you borrow £200 you can never repay more than £400 in total, no matter how long the debt runs.

The cap made single-repayment lending significantly less viable for many providers. Most lenders operating today — including Cash Train — offer instalment products rather than classic single-payment payday loans.

Payday loan vs instalment loan: the key differences

The two products serve similar needs — bridging a short-term cash gap — but work very differently in practice.

Classic payday loan
Borrow £100–£1,000
Repaid in one payment
Term: 14–31 days
Whole sum leaves account at once
Fine if you're certain of payday amount
Risky if plans change mid-month
Instalment loan
Borrow £100–£5,000
Repaid across 2–24 monthly payments
Term: 2 months to 2+ years
Smaller amounts leave account each month
Easier to budget month-to-month
More interest paid over longer terms

Practical rule: if you can comfortably absorb the full repayment in one go next payday and you are certain your income arrives on time, a short-term single-payment product may cost slightly less in total. If there is any doubt, spreading repayment over a few months reduces the risk of a shortfall that triggers missed-payment charges.

What does this actually cost in pounds?

Abstract APR figures rarely help when you are deciding whether to borrow. These indicative examples — subject to status and affordability — show the real pound cost on Cash Train's Flex tier (49.9% APR representative, fixed rate).

£200
Small emergency: car repair, household bill
Term: 3 months
Monthly: £72.50 / mo
Total repayable: £217.50
£500
Representative example — Cash Train Flex
Term: 6 months
Monthly: £95.21 / mo
Total repayable: £571.26
£1,000
Larger bridge: home repair, equipment
Term: 12 months
Monthly: £97.14 / mo
Total repayable: £1,165.68

Indicative figures only. Representative example: borrow £500 over 6 months at 49.9% APR (fixed). Monthly payment £95.21. Total repayable £571.26. Rates shown are for Cash Train's Flex tier. Quick tier: 149.9% APR representative. Plus tier: 39.9% APR representative. Loans from £100 to £5,000. Your actual rate is subject to status and affordability assessment.

The risks worth understanding

Short-term credit is a tool, not a solution. Used appropriately — for a genuine one-off shortfall you know you can bridge — it works. The problems arise in predictable patterns:

Rolling over repeatedly
Taking a new loan to repay the previous one. The FCA caps rollovers at two, but even two roll-overs significantly increase total cost. If you are considering a third loan to cover the second, that is a signal to stop and seek debt advice.
Borrowing to cover regular shortfalls
If you need short-term credit every month, the underlying problem is a gap between income and outgoings — not a one-off emergency. Borrowing repeatedly widens that gap through interest charges.
Stacking multiple loans
Taking loans from several lenders simultaneously is visible to lenders via credit reference agencies. It damages your credit profile and increases the risk of unmanageable debt.
Ignoring the total repayable
Always check the total repayable, not just the monthly payment or the APR. Small monthly payments over a long term can result in a much larger total cost than a shorter, higher monthly commitment.

Alternatives worth trying first

Before applying for any short-term loan — ours or anyone else's — check whether any of these options fit your situation. Several cost nothing or very little:

Credit union loan
Credit unions offer emergency loans at low interest rates — often 12–26.8% APR, far below any short-term lender. You must join first (usually a workplace or community link), and some have a savings requirement before lending. Find yours at findyourcreditunion.co.uk.
Salary advance / employer scheme
Services such as Wagestream or Hastee let you access pay you have already earned before payday. Some employers offer direct advances. No interest; small flat fee typical.
Authorised bank overdraft
An arranged overdraft can be cheaper than a short-term loan for a few days of borrowing — but only if the daily fee is low. Check the effective APR of your overdraft before assuming it is cheaper.
StepChange / Turn2Us grants
If you are in financial difficulty, Turn2Us can identify grants you may be entitled to — money that does not need to be repaid. StepChange offers free debt advice and can negotiate with creditors on your behalf.
0% purchase credit card
If your credit score qualifies, a 0% card for 3–24 months costs nothing in interest provided you clear it before the offer ends. Not accessible to everyone, but worth a soft search check first.

Quick reference: key terms

CPA: Continuous Payment Authority — how lenders collect repayments from your debit card automatically.
FCA price cap: 0.8%/day max interest; total charges capped at 100% of the amount borrowed.
Rollover: Extending a payday loan by taking a new one to cover it. Capped at two by FCA rules.
Instalment loan: A loan repaid in equal monthly payments over a fixed term — the most common UK short-term product today.
Representative APR: Rate at least 51% of approved applicants receive. Your personal rate may be higher.
Total repayable: The single most important figure — principal + all interest + all fees. Compare this, not APR.

Related guides

Understanding borrowing

Loan types explained — personal, payday, BNPL and more

Personal loans, payday loans, overdrafts, secured loans, peer-to-peer, buy now pay later. How they differ, who they suit, and the risks.

7 min read →
Understanding borrowing

What is APR? Explained simply

Why a 149.9% APR loan can cost less than a 25% APR credit card — and why total repayable is the number you should actually focus on.

4 min read →
Comparing options

Emergency expenses — your options explained

Overdraft, credit card, personal loan, payday loan — an honest side-by-side guide to help you choose the right option for an unexpected cost.

8 min read →

← Back to all guides

Related guides

← All guides
Understanding borrowing

Loan types explained — personal, payday, BNPL and more

Personal loans, payday loans, overdrafts, secured loans, peer-to-peer, buy now pay later. How they differ, who they suit, and the risks.

7 min read →
Understanding borrowing

What is APR? Explained simply

Why a 149.9% APR loan can cost less than a 25% APR credit card — and why total repayable is the number you should actually focus on.

4 min read →
Comparing options

Emergency expenses — your options explained

Overdraft, credit card, personal loan, payday loan — an honest side-by-side guide to help you choose the right option for an unexpected cost.

8 min read →
Common questions

FAQ

A payday loan is a short-term loan — typically £100–£1,000 — designed to be repaid in a single lump sum on your next payday, usually within 14–31 days. The lender advances you cash now; you repay the principal plus a fee or interest charge on a fixed date. They were widespread in the UK from roughly 2008–2014 but became heavily restricted following FCA intervention in 2015, which capped daily interest at 0.8% and total charges at 100% of the original loan.
The core difference is repayment structure. A payday loan is repaid in one payment on a single due date. An instalment loan spreads repayment across multiple monthly payments — anywhere from 2 to 36 months depending on the lender and amount. Instalment loans tend to have lower APRs because the interest accrues over a longer period, and monthly payments are smaller, making it easier to budget without a large lump-sum hit to your current account.
Yes, but far fewer lenders offer them than a decade ago. The FCA's 2015 price cap made single-payment payday lending significantly less commercially viable, so most lenders now offer short-term instalment loans instead. Some payday-style products persist under different names, but if you're searching for emergency short-term credit, you're now more likely to be offered a 3–12 month instalment product than a classic 30-day single-repayment payday loan.
The main alternatives in the UK include: a credit union emergency loan (typically lower cost, but you may need to be a member first); a 0% purchase credit card if your credit score qualifies; an authorised bank overdraft (check the fee structure — daily fees can add up); a personal loan from a bank or building society if you have a fair or good credit history; a salary advance through an employer scheme such as Wagestream; and for those in financial hardship, grants or no-interest loans from charities such as Turn2Us or StepChange. Cash Train's instalment product is designed as a middle-ground: accessible with imperfect credit, but structured so you repay over months rather than one alarming lump sum.

Instalment loans built around your budget.

See your rate and total repayable upfront — no surprises, no obligation to proceed. Apply with Cash Train today.

Check my eligibility →
Check your rate →