Overview
Payday loans are a form of high-cost short-term credit (HCSTC). When they become unaffordable, the consequences can escalate quickly — missed payments, rising charges, and repeated collection attempts. The UK has a regulatory framework, overseen by the Financial Conduct Authority (FCA), that places specific limits on what lenders can charge, how they can collect payment, and how they must treat borrowers in financial difficulty. There are also formal processes for seeking debt relief and, in some circumstances, obtaining refunds for loans that should not have been granted in the first place.
This guide sets out how those systems work. It covers the FCA price cap, the rules on payment collection, the complaint and refund process, the Breathing Space scheme, and the main debt solutions available in the UK. It also lists free debt advice services and their contact details.
Quick Answer (Read This First)
If payday loans have become unaffordable, three things are worth understanding immediately.
First, there is a legal cap on what payday lenders can charge. Since 2 January 2015, FCA rules mean that borrowers never repay more than double the amount they originally borrowed. Daily interest and fees are capped at 0.8% of the principal per day, default fees are capped at a total of £15, and the overall cost of the loan — including all interest, fees, and charges — cannot exceed 100% of the amount borrowed.
Second, lenders are required by FCA rules to treat borrowers in financial difficulty with forbearance and due consideration. This includes considering options such as suspending, reducing, waiving, or cancelling interest and charges, allowing deferment of arrears, and accepting token payments.
Third, if a loan was unaffordable at the time it was taken out — meaning the borrower could not repay it without undue hardship — it may be possible to complain to the lender and, if necessary, to the Financial Ombudsman Service (FOS). This can result in a refund of interest and charges.
Free, confidential debt advice is available from several organisations, and their contact details are listed at the end of this guide.
How the System Works
Regulation of Payday Lending
The Financial Conduct Authority (FCA) regulates all payday lending in the UK. All payday lenders must be FCA-authorised. The FCA took over consumer credit regulation from the Office of Fair Trading (OFT) on 1 April 2014.
The foundational legal framework for consumer credit agreements, including payday loans, is the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006). This legislation sets requirements for licensing, the form and content of credit agreements, APR calculation, and consumer protections.
Section 131 of the Financial Services (Banking Reform) Act 2013 placed a statutory duty on the FCA to impose a cap on the cost of high-cost short-term credit, requiring implementation by 2 January 2015. The legislation mandated the cap but did not specify the cap levels, leaving those to FCA rule-making.
The FCA Price Cap
Since 2 January 2015, FCA rules impose a three-part price cap on payday loans and other high-cost short-term credit (HCSTC):
- Initial cost cap: 0.8% per day on the principal. This is the maximum daily interest and fees that can be charged on the amount borrowed. For single-repayment loans, this is calculated on the principal sum, not the outstanding balance.
- Default fee cap: £15 total. This is the maximum amount that can be charged in default fees, covering administration and debt collection. Interest can continue after default, but at no more than 0.8% per day on the outstanding principal plus default charges.
- Total cost cap: 100% of the amount borrowed. The total of all interest, fees, and charges — including default charges — can never exceed the original principal. This means borrowers never repay more than double what they borrowed. The cap applies across all connected agreements.
These rules apply to HCSTC agreements entered into on or after 2 January 2015. HCSTC is defined as unsecured credit with an APR of 100% or more, repayable within 12 months. Home credit, overdrafts, and credit union loans are excluded from this definition.
Rollover Restrictions
FCA rules limit payday loans to a maximum of two rollovers (refinances). After two rollovers, the lender must offer forbearance options rather than further refinancing. This rule has applied to HCSTC since 1 July 2014.
Continuous Payment Authority (CPA) Rules
A Continuous Payment Authority is a type of recurring payment that allows a lender to take money from a borrower's bank account or card. FCA rules limit payday lenders to a maximum of two unsuccessful CPA attempts to take payment.
Borrowers have the legal right to cancel a CPA at any time by contacting their bank or card issuer. The bank must stop the payment once instructed. If a payment is taken after a valid cancellation, it is unauthorised and must be refunded by the bank.
It is important to understand that cancelling a CPA does not eliminate the underlying debt obligation. It stops the payment method, not the debt itself.
Lender Forbearance Obligations
FCA rules (CONC 7.3) require lenders to treat customers in financial difficulty with forbearance and due consideration. The options lenders are required to consider include suspending, reducing, waiving, or cancelling interest and charges; allowing deferment of arrears; and accepting token payments.
Firms are also expected to consider reducing, waiving, or cancelling interest and charges where needed to make repayment arrangements sustainable.
Key Rules, Thresholds, and Timelines
Price Cap Summary
| Component | Cap | Detail |
|---|---|---|
| Daily cost | 0.8% per day | On the principal sum |
| Default fees | £15 total | All administration and collection fees combined |
| Total cost | 100% of principal | Borrower never repays more than double the amount borrowed |
These apply to all HCSTC agreements from 2 January 2015.
CPA and Rollover Limits
| Rule | Limit |
|---|---|
| Unsuccessful CPA attempts | Maximum 2 |
| Loan rollovers | Maximum 2 |
Complaint Timelines
When making a complaint to a payday lender about unaffordable lending, the lender must respond within 8 weeks. If the lender rejects the complaint or does not respond within that period, the complaint can be escalated to the Financial Ombudsman Service. The borrower must complain to FOS within 6 months of the lender's final response. There is no statutory timeframe for a FOS decision; the process typically takes several months depending on complexity.
Breathing Space Duration
Standard Breathing Space lasts up to 60 days from its start date. Mental Health Crisis Breathing Space lasts for the duration of the crisis treatment plus 30 days.
Common Points of Confusion
"The price cap means interest stops at some point."
The price cap does not stop interest from accruing — it limits the total that can be charged. Interest can continue to be applied at up to 0.8% per day, but the total cost of the loan (all interest, fees, and charges combined) cannot exceed 100% of the original amount borrowed. This means the most a borrower can ever owe is double the original principal.
"Cancelling a CPA cancels the debt."
Cancelling a Continuous Payment Authority stops a specific payment method. It prevents the lender from using that CPA to take money from the borrower's account. It does not cancel, reduce, or affect the debt itself. The debt remains owed.
"Loans before 2015 had no rules."
Payday loans taken before 2 January 2015 were not subject to the current FCA price cap, but they were regulated under different rules (OFT regulation). Complaints about unaffordable lending can still be made about pre-2015 loans. The OFT's Irresponsible Lending Guidance applied before the current FCA rules came into force.
"All short-term credit falls under the price cap."
The HCSTC definition — and therefore the price cap — does not include all short-term borrowing. Home credit, overdrafts, credit union loans, and loans from community finance organisations are specifically excluded. These lenders are subject to different regulatory frameworks.
"Breathing Space is available across the UK."
The Debt Respite Scheme (Breathing Space) applies only in England and Wales. Scotland has a separate Debt Arrangement Scheme (DAS). Northern Ireland does not have an equivalent scheme. Individuals in Scotland or Northern Ireland have different options and should seek advice accordingly.
"If a loan was unaffordable, I'll automatically get a refund."
There is no automatic refund process. A complaint must first be made to the lender directly. If the lender rejects the complaint or does not respond within 8 weeks, the matter can be escalated to the Financial Ombudsman Service. The FOS assesses affordability on a case-by-case basis.
Important Exceptions or Edge Cases
Pre-2015 Agreements
The FCA price cap applies only to agreements entered into on or after 2 January 2015. Loans taken before this date were subject to different rules under OFT regulation. However, complaints about irresponsible or unaffordable lending can still be made for pre-2015 loans, as the OFT's Irresponsible Lending Guidance was in effect during that period.
Credit Union and Community Finance Exemptions
Credit union loans and community finance organisation loans are excluded from the HCSTC definition and are not subject to the FCA price cap. These lenders operate under different regulatory frameworks.
Unlicensed Lenders
Illegal lending is a crime. Victims have protections, and illegal lending agreements are unenforceable. Anyone dealing with an unlicensed lender should report it to the police or the relevant Illegal Money Lending Team:
- England: 0300 555 2222
- Scotland: 0141 287 6655
- Wales: 0300 123 3311
- Northern Ireland: 028 9046 4422
Geographic Variations in Breathing Space
The Debt Respite Scheme (Breathing Space) only applies in England and Wales. Scotland operates a separate Debt Arrangement Scheme (DAS). Northern Ireland does not currently have an equivalent statutory scheme.
Debts Excluded from Breathing Space
Certain debts cannot be included in Breathing Space. These include ongoing secured loan payments, debts arising from fraud, criminal fines, confiscation orders, child maintenance, student loans, damages for death or personal injury, advance payments of Universal Credit, council tax that is not yet due, and debts incurred during the breathing space period itself.
Mortgage and rent arrears can be included in Breathing Space, but ongoing secured payments remain due. Joint debts can be included even if only one party enters Breathing Space.
Mental Health Crisis Breathing Space — No Frequency Limit
Unlike standard Breathing Space, which cannot be accessed more than once in a 12-month period, there is no restriction on how many times an individual can enter Mental Health Crisis Breathing Space. Each entry requires confirmation from an Approved Mental Health Professional (AMHP) that the individual is receiving crisis treatment.
What This Means in Practice
Complaining About an Unaffordable Loan
The complaint process has two stages. In most cases, the borrower contacts the lender directly — in writing, by letter or email — explaining why the loan was unaffordable and requesting a refund of interest and charges. The lender is required to respond within 8 weeks. Template letters for this purpose are available from debt advice charities.
If the lender rejects the complaint or fails to respond within 8 weeks, the complaint can be escalated to the Financial Ombudsman Service (FOS). The FOS is a free, independent dispute resolution service. The borrower must refer the complaint to FOS within 6 months of the lender's final response. The FOS can be contacted on 0800 023 4567 or 0300 123 9123.
A loan may be considered unaffordable if the borrower could not repay it without undue hardship — for example, according to published guidance, if the borrower had to take out new loans to repay existing ones, missed essential bills, or could not afford food. However, there is no single statutory definition of "undue hardship"; the FOS assesses affordability on a case-by-case basis, applying principles from the FCA Handbook (CONC 5.2, which requires lenders to conduct proportionate affordability checks) and relevant case law.
In most cases, where a complaint is upheld by the FOS, the remedy includes a refund of interest and charges. According to published guidance, 8% simple interest may also be applied to the refund amount, calculated from the date of payment to the date of settlement. The specific legal basis for this rate may vary, and the rate or approach may differ in exceptional circumstances.
Cancelling a CPA
To cancel a Continuous Payment Authority, the borrower contacts their bank or card provider. The bank is legally required to stop the payment once instructed. The borrower can also inform the lender, but the bank has an independent duty to honour the cancellation.
If a payment is taken after a valid cancellation request, it is treated as unauthorised and must be refunded.
Applying for Breathing Space (England and Wales Only)
Breathing Space is not something a borrower applies for directly. The borrower must contact an FCA-authorised debt advice provider, who assesses eligibility and whether Breathing Space is appropriate. If approved, the adviser adds the details to the Insolvency Service's electronic register. Protections begin the next day, and creditors are notified.
To be eligible for standard Breathing Space, an individual must live in England or Wales, owe at least one qualifying debt, not be in a Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA), or undischarged bankruptcy, and must not have had a standard Breathing Space in the last 12 months. The debt adviser must also be satisfied that the individual cannot, or is unlikely to be able to, repay some or all of their debts.
During the 60-day period, a midway review is conducted between days 25 and 35. The individual must continue engaging with debt advice and keep up priority bills.
For Mental Health Crisis Breathing Space, the individual must be receiving mental health crisis treatment, confirmed by an Approved Mental Health Professional (AMHP). AMHP evidence is provided to the debt adviser to register the crisis moratorium. Protection lasts for the duration of the crisis treatment plus 30 days.
Other Debt Solutions
Debt Relief Orders (DROs) provide a 12-month moratorium on debts. If the individual's circumstances remain unchanged after 12 months, the debts are written off. In most cases, according to published guidance, eligibility requires debts under £50,000, disposable income under £75 per month, assets under £2,000 (with a vehicle up to £4,000 excluded), and the individual must not be a homeowner. No fee is payable. A DRO cannot be obtained if one has been held within the last 6 years. These threshold figures may be subject to periodic review and should be verified at the time of application.
Individual Voluntary Arrangements (IVAs) are legally binding repayment plans, typically lasting 5 to 6 years, in which interest is frozen and remaining debt is written off on completion. In most cases, IVAs are used by those with regular income who are able to make monthly payments. Approval by 75% (by value) of creditors is required. A licensed insolvency practitioner must be used, fees apply, and an IVA is recorded on the credit file for 6 years. Published guidance from debt advice charities suggests IVAs are typically considered for debts over £6,000, though this is not a statutory minimum and may vary.
FAQ
Key Takeaways
- Price Cap: The FCA price cap limits daily costs to 0.8%, default fees to £15, and total cost to 100% of the principal.
- Collection Limits: Lenders are limited to two unsuccessful CPA attempts and two rollovers. CPAs can be cancelled by the borrower.
- Forbearance: Lenders must treating borrowers with forbearance, including considering freezing or reducing charges.
- Refunds: Unaffordable loans can be challenged via the lender and FOS, potentially leading to refunds of interest and charges.
- Safety Net: Breathing Space provides legal protection for up to 60 days in England and Wales.
- Help: Free debt advice is available from regulated charities.
IMPORTANT
This guide is for informational purposes only and does not constitute financial, legal, or debt advice. Rules, thresholds, and processes described here are based on confirmed regulatory sources and published guidance as understood at the time of writing. Figures and rules may change. Individuals should verify current details with the relevant authorities or a free debt advice provider before taking any action.
