For anyone with a poor credit history, finding a lender willing to help can feel like a significant obstacle. Two products tend to come up most often in these situations: payday loans and bad credit loans. At first glance they may appear to serve the same purpose, but they are structured very differently, carry different costs, and suit different circumstances.

This guide sets out how each product works, compares them directly across the factors that matter most, and explains the risks of each. It is intended to give readers enough information to understand their options; it does not constitute financial advice. If there is any uncertainty about which product is appropriate for a particular situation, speaking to a qualified debt adviser or broker before applying is strongly recommended.

What Is a Payday Loan?

A payday loan is a short-term, unsecured loan typically designed to be repaid in full on the borrower’s next payday, usually within two to four weeks. They are marketed as a way to cover urgent, unexpected costs (such as a car repair or an unexpectedly high utility bill) when a borrower is short of funds before their next wage payment. In the UK, payday lenders are regulated by the Financial Conduct Authority (FCA), which introduced a cap on the cost of payday credit in 2015 to limit the damage that could be caused by very high interest charges.

Despite the FCA cap, payday loans remain among the most expensive forms of consumer credit available in the UK. The following features are common to most payday loan products, though specific terms vary between lenders:

• Repayment is typically due in full on the next payday, meaning the entire principal and interest must be paid in one go rather than spread across monthly instalments.
• APR figures are very high when annualised, even under the FCA cap, because of the short term involved. A 0.8% daily interest cap sounds modest but translates to a very high effective annual rate.
• Loan amounts are usually small, often between £100 and £1,000, though some lenders go higher.
• Approval decisions are typically fast, often within minutes, with funds transferred the same day or next business day.
• Credit checks may be limited, with some lenders placing more weight on current income and bank account activity than on full credit file searches.

The speed and accessibility of payday loans are what make them appealing in a crisis. The risk, covered further below, is that the lump-sum repayment structure puts significant pressure on the borrower’s finances at the point the loan falls due, and any failure to repay in full on time can escalate costs quickly.

What Is a Bad Credit Loan?

A bad credit loan is a broader category of lending specifically aimed at borrowers who have a history of missed payments, defaults, County Court Judgements (CCJs), or other markers that cause mainstream lenders to decline applications. Unlike payday loans, bad credit loans are typically repaid in monthly instalments over a period of months or years. They can be either unsecured, meaning they rely on the borrower’s creditworthiness and income alone, or secured, meaning they are backed by an asset such as a vehicle or property. If you are new to this type of lending, what are bad credit loans provides a thorough introduction.

The instalment structure is the defining difference from a payday loan. Rather than repaying everything in one payment, the borrower makes regular monthly payments over the agreed term, which makes budgeting more predictable. Lenders in this space assess affordability rather than relying solely on credit score, which is why borrowers who have been declined elsewhere can sometimes still qualify. Interest rates are higher than mainstream personal loans to reflect the additional risk the lender is accepting, and the gap between secured and unsecured bad credit loans can be significant. The question of secured versus unsecured bad credit loans is worth understanding before applying, particularly for larger sums.

How the Two Products Compare

The table below summarises the main differences between payday loans and bad credit loans across the factors most likely to influence a borrowing decision. These are general descriptions; specific terms vary between lenders and individual applications.

The cost difference is the most important factor for most borrowers. Because payday loans are repaid over days or weeks rather than months or years, their APR figures are extremely high even when the daily interest is capped. For example, borrowing £300 for 30 days at the FCA maximum rate of 0.8% per day would cost £72 in interest, making a total repayment of £372. A bad credit instalment loan for the same amount over 12 months would likely cost less in total interest, spread across manageable monthly payments, though rates still vary considerably and the total cost of a longer-term loan can accumulate if the term is extended. Understanding how the rate offered to any individual borrower relates to the advertised rate is important, particularly for bad credit lending where personal circumstances have a significant effect on the rate applied.

The visual below illustrates how representative APR works in practice: why the rate advertised by a lender is not necessarily the rate any given borrower will receive.

The practical implication is that borrowers with weaker credit profiles (the very group most likely to be considering a bad credit loan) are also the group most likely to be offered a rate above the representative figure. Checking eligibility through a soft search before submitting a formal application is the most effective way to understand what rate is actually available. The role of interest rates in bad credit loans is worth reading before comparing specific products.

Risks to Understand Before You Borrow

Both products carry meaningful risks, and the nature of those risks differs in ways that matter. The table below outlines the primary risk factors for each, followed by explanatory context on the most important ones.

The rollover risk associated with payday loans deserves particular attention. When a borrower cannot repay the full balance on the due date, some lenders have historically offered to extend the loan (known as rolling over) in exchange for an additional fee. The FCA now limits payday loan rollovers to two, and lenders are required to provide information about free debt advice before agreeing to a rollover. Even within those limits, however, a borrower who rolls over twice and still cannot repay faces escalating charges that can quickly exceed the original loan amount. The structure of the product, with a single large repayment due at a time when the borrower has just received their wages, can create a cycle in which the repayment itself leaves insufficient funds to cover essential expenditure, prompting further borrowing.

For secured bad credit loans, the asset risk is the critical factor. A borrower using their vehicle or property as collateral for a bad credit loan is agreeing that the lender may take that asset if repayments are not maintained. This is a significant commitment and one that distinguishes secured bad credit lending from the unsecured payday loan market entirely. Anyone considering a secured product should understand clearly what asset is being used, what the lender’s enforcement rights are, and what the realistic consequences of default would be for their day-to-day life. Understanding how bad credit loans affect your credit score is also an important part of the decision.

Which Tends to Suit Which Situation

Neither product is suitable for everyone, and neither is suitable for managing long-term or structural financial difficulties. The descriptions below are framed in terms of circumstances rather than recommendations, as the right option for any individual depends on their specific financial position, income stability, and ability to repay.

Alternatives Worth Considering

Before committing to either a payday loan or a bad credit loan, it is worth establishing whether any lower-cost or free alternatives are available. The options below are not suitable for every situation, but each is worth investigating before taking on high-cost credit.

Credit unions are member-owned financial cooperatives that typically offer personal loans at significantly lower rates than payday lenders. In the UK, credit unions are regulated by the Prudential Regulation Authority and the FCA. Rates are capped by law (currently at 3% per month, or 42.6% APR) and are often lower than this in practice. Membership requirements vary, but many credit unions accept members based on location, employer, or other community ties. The application process may take longer than a payday lender, but the cost saving can be considerable.

An authorised overdraft with a bank or building society may be another option for short-term borrowing, particularly if the borrower already has a current account with their provider. Authorised overdraft rates vary and can be high, but they are generally lower than payday loan rates for small amounts over short periods. Exceeding an authorised overdraft limit, or using an unarranged overdraft, carries its own costs and should be avoided. It is worth contacting the bank directly before assuming an overdraft is available or what rate applies.

For those receiving Universal Credit or other qualifying benefits, the government offers Budgeting Loans and Budgeting Advances as interest-free borrowing specifically to cover essential costs such as furniture, clothing, or emergency expenses. These are repaid from future benefit payments and carry no interest charge. Eligibility depends on benefit type and how long the claimant has been receiving it, so it is worth checking with the relevant government service directly.

Employer salary advance schemes, where an employer allows access to earned wages before the scheduled payday, are increasingly common and typically free or very low cost. Not all employers offer this, but it is worth asking if the need is urgent and the employment relationship supports it. Some third-party apps also facilitate salary advances through agreements with employers, though the fee structures of these products vary and should be checked carefully before use.

Tools to help you compare

Frequently Asked Questions

Can someone with a very poor credit score get a bad credit loan in the UK?

Yes, in many cases. Bad credit loans are specifically designed for borrowers who have a history of missed payments, defaults, CCJs, or other markers that lead mainstream lenders to decline applications. Lenders in this market assess affordability (income, outgoings, and the ability to sustain repayments) rather than relying solely on credit score. This means some borrowers who have been declined by a high-street bank may still qualify, provided their income and expenditure support the repayments.

However, a very poor credit history will typically result in a higher interest rate being offered, and the loan amount may be smaller than requested. Lenders are also required by FCA rules to carry out affordability checks, meaning a borrower whose income cannot comfortably support the monthly repayment is likely to be declined regardless of credit score. Checking eligibility through a soft search (which does not affect the credit file) before submitting a full application is always advisable. A guide to whether bad credit loans are a good idea provides a useful broader perspective on this question.

Are bad credit loans cheaper than payday loans?

In most cases, yes, at least in terms of total interest paid relative to the amount borrowed over comparable periods. Payday loans carry very high effective annual percentage rates because of the short repayment period and the daily interest structure. Even under the FCA cap, the total cost of a payday loan for a given sum will typically exceed the total cost of a bad credit instalment loan for the same amount over a longer term.

That said, the comparison is not straightforward because the two products are used differently. Payday loans are for very short periods, while bad credit loans run for months or years. A bad credit loan taken over a long term will accumulate interest across many months, and the total amount repaid can be significantly more than the amount borrowed. The monthly payment figure can look affordable while the total cost is substantial. It is always worth calculating the total amount repayable, not just the monthly payment, before committing. The loan comparison tool can help illustrate the difference that term length makes to total cost.

Can either product help rebuild a credit score?

A bad credit loan that is repaid consistently and on time can make a positive contribution to a credit file over time. Credit reference agencies (Experian, Equifax, and TransUnion) record payment history, and a record of regular, on-time payments on an instalment loan demonstrates financial responsibility to future lenders. This is one reason why bad credit instalment loans are sometimes described as a credit-building tool, though this benefit only materialises if repayments are maintained throughout the term.

Payday loans have a more limited credit-building effect and carry their own risks. Some lenders and mortgage underwriters view a history of payday loan use as a signal of financial stress, even if all repayments were made on time. This can affect a borrower’s ability to obtain mainstream credit, including mortgages, in the future. Any missed or late payment on a payday loan is reported to credit reference agencies quickly and can have a disproportionately negative effect on a credit score relative to the small sums involved. For a detailed explanation, how bad credit loans affect your credit score is worth reading.

What happens if a repayment cannot be made on time?

For payday loans, missing a repayment triggers immediate consequences. The lender will typically attempt to collect via a continuous payment authority (CPA), which means attempting to take the payment directly from the borrower’s bank account. If the funds are not available, the lender may make multiple attempts, and each failure may be accompanied by a charge. The FCA limits lenders to two CPA attempts on the original agreed amount before they must contact the borrower. A missed payment will be reported to credit reference agencies and will affect the credit file.

For bad credit loans, the consequences of a missed payment depend on the lender and the loan agreement, but typically include a default charge, notification to credit reference agencies, and, if the default continues, potential enforcement action. For secured bad credit loans, sustained non-payment can ultimately result in the lender seeking to repossess the asset used as collateral. In all cases, the recommended course of action if a repayment is going to be missed is to contact the lender before the payment date rather than after. Lenders regulated by the FCA are required to treat customers in financial difficulty fairly, and early contact typically results in better outcomes than waiting for enforcement action to begin.

How does FCA regulation apply to both types of lending?

Both payday lenders and bad credit loan providers operating in the UK must be authorised by the Financial Conduct Authority. This means they are subject to rules on responsible lending, affordability assessment, clear disclosure of costs, and fair treatment of customers in financial difficulty. Before taking out any loan, it is worth confirming that the lender is authorised by checking the FCA register at register.fca.org.uk. Any lender offering credit in the UK without FCA authorisation is operating illegally.

For payday lending specifically, the FCA introduced a price cap in January 2015 that limits daily interest to 0.8% of the outstanding balance, caps default charges at £15, and prevents the total cost of the loan (including all charges) from exceeding 100% of the original loan amount. This means a borrower can never repay more than double what they borrowed, even in the worst-case scenario. These protections do not make payday loans cheap, but they do mean the maximum cost is defined and limited. For bad credit loans more broadly, the key protections are the requirements to carry out affordability checks, provide clear pre-contract information, and follow the FCA’s consumer duty obligations around fair outcomes.

Where can free debt advice be found in the UK?

Several well-established, non-profit organisations provide free and confidential debt advice in the UK. StepChange Debt Charity (stepchange.org) offers online debt advice tools and telephone support, and can help borrowers understand all available options including debt management plans, individual voluntary arrangements, and bankruptcy where relevant. Citizens Advice (citizensadvice.org.uk) provides broader financial guidance and can assist with benefit entitlements, budgeting, and creditor negotiation as well as debt advice. National Debtline (nationaldebtline.org) offers free telephone and online advice for people in England, Wales, and Scotland.

These services are free at the point of use and do not have a commercial interest in the outcome of any advice given. Before taking on any high-cost credit (payday loan or bad credit loan), speaking to one of these organisations can help establish whether borrowing is the right course of action, or whether an alternative approach such as a payment arrangement with an existing creditor might resolve the immediate financial pressure without adding new debt. Using a service that charges for debt advice when free alternatives are available is worth avoiding; any fee-charging debt adviser should be treated with caution unless they are clearly FCA-authorised and their fee structure is transparent.

This article is for informational purposes only and does not constitute financial advice. Borrowing decisions should be based on individual circumstances. If you are experiencing financial difficulty, free advice is available from StepChange (stepchange.org) and Citizens Advice (citizensadvice.org.uk). Your home or other assets may be at risk if you take out a secured loan and do not keep up repayments.