A closer look at the facts and figures of payday loans
07 Nov 2017
Payday loans (or high-cost, short-term credit) are short-term lending for small amounts of money. These loans can be accessed quickly, even by those with bad credit or lower incomes. The tradeoff is that they usually come at a high cost. While 4 in 5 of these loans are usually paid off in 31 days or less, if we look at the typical interest rates charged, it works out to be 1,300% annualised. Rates vary by payday lender, but compared with most other credit options, this is an expensive way to borrow.
Take a look at the diagram below which illustrates the different types of personal loans and where payday loans fit in:
We analysed the most recent Competition & Markets Authority (CMA)’s Payday lending market investigation report (2015) to provide helpful insights into the high-cost short-term lending market.
The latest facts and figures
In January 2015, a cap was introduced on the interest rates that can be charged on payday loans in an effort to regulate them. These are marketed as one-off loans for unexpected expenses. However, due to the accessibility of these loans, it has resulted in people using it for everyday expenses such as groceries, bills and car costs when they are short on cash. About a quarter of payday loans in the UK are rolled over to a new loan term and typically charge £24 a month for every £100 borrowed.
The average payday loan customer
CMA determined the typical characteristics of a payday loan and its borrowers through the analysis of their loans data. Whilst the single most common amount borrowed was £100, the average loan size was £260. 75% of the customers in their data took out more than one loan in a year with the average customer taking out 6 loans in a year.
People are more likely to take out a payday loan if they are unmarried, between 25 and 30 years old, living in rented accommodation and on an income of under £1,500 per month.
Where do customers typically access payday loans?
Payday loans can be accessed both online as well as on the high street. The CMA reported 83% of payday loan customers took out a loan online whilst 29% did so in-store. An overlap of 12% of payday loan customers has used both channels.
What are payday loans used for?
Even though payday loans were designed as one-off loans for unexpected expenses, the actual result is quite different. An alarming proportion of people have admitted to using payday loans to cover recurring expenses. Over 1 in 2 (53%) borrowers reported “Living expenses such as groceries and utility bills” as their reason for taking out a payday loan. 2% of borrowers confessed to taking out a payday loan in order to pay off another one. Other reasons include car or vehicle expenses (10%) and general shopping such as clothes or household items (7%).
Over half of borrowers (52%) said they had to take out a payday loan because they suffered an unexpected increase in expenses or outgoings whilst almost 1 in 5 (19%) said it was due to an unexpected decrease in income. Of those who said their need was due to a shift in financial circumstances, 93% saw this change as temporary. Almost 3 in 5 (59%) said their payday loan was for something that they could not have gone without. Even though almost 1 in 4 (24%) of these people said that they would have gone without the purchase if a payday loan had not been available.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.