A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday. The loans are also sometimes referred to as cash advances.

Due to the extremely short-term nature of payday loans, the difference between APR and effection annual rate (EAR) can be substantial, because EAR takes coumpounding into account. For a £30 charge on a £100 1 month payday loan, the APR is 12 × 30% = 360% but the EAR is (1.30¹² − 1) × 100% = 2,229%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.

The number of payday loans has grown in the UK: between August 2007 and June 2008, the number of loans made grew by more than 130%.

Unlike in many US states, in the UK there is no prohibition on “rolling over” lending. There does not seem to be a usury limit either: one UK company offers a “typical APR” of 2229.8%, although this takes compounding into account; without compounding the APR would be 360%. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. In particular, the “typical APR” must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.