Small loans in the UK: rules, costs and safer alternatives

In Britain, a small loan can mean many things: an arranged overdraft, a credit card, a short instalment loan from an online lender, a credit union loan or a high-cost short-term loan, the product people still call a "payday loan". All of them are regulated consumer credit, and since 2014 the Financial Conduct Authority has been in charge of the whole market.

This guide gives an overview of the UK rules, the price cap on high-cost short-term credit, the credit checks lenders run and the free help available. Separate pages cover borrowing with a negative credit file in the UK and borrowing while receiving Universal Credit. Mini-pret.com does not lend or broker loans.

The FCA and authorisation

Any firm lending to consumers in the UK, or broking consumer credit, must be authorised by the Financial Conduct Authority (FCA). The FCA Financial Services Register shows whether a firm is authorised, its registered name, its permissions and its contact details. Checking the register takes a minute and is the single most useful step before applying for any loan.

Authorised lenders must assess affordability, treat customers in financial difficulty with forbearance, and follow the Consumer Duty, which requires them to deliver good outcomes and fair value. If you are unhappy with how a lender has treated you, complain to the firm first; if it does not resolve the issue, you can take the complaint to the Financial Ombudsman Service free of charge.

The price cap on high-cost short-term credit

Since January 2015, high-cost short-term credit has been subject to an FCA price cap with three parts:

• interest and fees may not exceed 0.8% per day of the amount borrowed;
• default fees are capped at £15;
• the total cost of interest and fees may never exceed 100% of the amount borrowed, so you will never repay more than twice what you borrowed.

Rollovers are also limited. The cap removed the worst spirals but did not make these loans cheap: the APR on a short loan at the cap is still very high compared with an overdraft or a credit union loan.

Credit checks and your credit file

UK lenders use the three main credit reference agencies: Experian, Equifax and TransUnion. Your file shows your accounts, repayment history, defaults, county court judgments and insolvencies. Defaults and most negative entries remain on the file for six years.

Many lenders now offer an eligibility checker that uses a soft search, which does not affect your score. A full application leaves a hard search that other lenders can see. Use eligibility checkers first and avoid applying to several lenders in a short time. You have a statutory right to see your credit file, and each agency offers a free way to view it.

Where small loans come from

Banks and building societies

An arranged overdraft or a small personal loan from your own bank is often the simplest route. Overdraft pricing was reformed in 2020, and most banks now charge a single annual interest rate on arranged overdrafts.

Credit unions

Credit unions are member-owned and authorised by the Prudential Regulation Authority and regulated by the FCA. The interest they can charge is limited by law, and many offer small loans to members with modest incomes, sometimes alongside a savings habit.

Online instalment lenders

These lenders offer loans of a few hundred to a few thousand pounds repaid over several months. Prices vary widely, from near-bank rates to high-cost credit at the cap.

Buy now, pay later

Interest-free instalment plans at checkout are widespread. Late payments can still lead to fees and, increasingly, to entries on your credit file. Keep track of every plan you open.

Checklist before you borrow

• Check the firm on the FCA Register, including for brokers.
• Compare the APR and the total amount repayable for the same sum and term.
• Use soft-search eligibility checkers before applying.
• Read the terms on late payment, default fees and continuous payment authority.
• Draw up a budget: can you pay this back without borrowing again next month?
• Remember your 14-day right to withdraw from a credit agreement.

Our small loan calculator helps you see the cost in pounds.

Scam warning signs

• Advance fee fraud: a "lender" asks for a fee, insurance or a deposit before paying out. Authorised lenders do not do this.
• Clone firms copying the name and register number of a real authorised firm. Always use the contact details on the FCA Register, not those in an email or advert.
• Loan sharks: unlicensed lenders who may use intimidation. The Illegal Money Lending Teams in England, Scotland and Wales can help, confidentially.
• Offers on social media promising guaranteed approval.

Free help and alternatives

• Free debt advice from MoneyHelper, Citizens Advice, StepChange and National Debtline. Never pay for debt advice.
• Breathing Space in England and Wales gives eligible people up to 60 days of legal protection from most creditor action while they get debt advice.
• Benefit and grant checks: your local council may run a welfare assistance scheme for emergencies, and energy suppliers sometimes have hardship funds.
• Budgeting advances or advances on benefits, for people on Universal Credit, repaid from future payments.
• Talk to your creditors: lenders must consider forbearance, such as reduced payments or frozen interest, when you are in difficulty.

If several debts are piling up, read our guide to consolidating small debts before taking a new loan.

Scotland, Wales and Northern Ireland

Consumer credit regulation by the FCA applies across the whole of the UK, but debt solutions differ. Scotland has its own procedures, such as the Debt Arrangement Scheme and its own form of bankruptcy, and Northern Ireland has separate insolvency rules. Local welfare support is also organised differently in each nation, so check what your council or devolved government offers before turning to credit.