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How Are Short Term Loans Regulated in the UK?

Short term loans are legal in the United Kingdom, short term loans can often help those who are in a tricky financial situation for a short period of time. 


Short term loans are usually unsecured loans, meaning that the loan is not secured against any asset of the borrower. 

This means that short term loans often have high APR and interest rates and usually need to be paid back within a matter of months or weeks. With more UK households needing short term loans than has been the case for quite some time, understanding how these loans work is important for any prospective borrower.

Payday loans are an example of a short term loan and these are legal in the UK. However, in recent years, the UK has begun to put regulations on short term loans, with the FCA (Financial Conduct Authority) clamping down on rogue operators and lenders as well as bad lending practices in the UK market. 

Are Short Term Loans Legal In The UK?

Yes, according to British law, short term loans are completely legal in the UK within some specific parameters and regulatory frameworks.. 

People will take short term loans in the UK in order to pay off an unexpected expense such as car repairs or an unforeseen medical bill. Such loans may come in the form of cash advance loans, payday loans, instalment loans and many others.

Short term loans just allow you to ease the financial burden slightly and you can repay your loan at the next possible time. 

Lenders, however, are subject to strict restrictions in the UK which are designed to protect borrowers from lending scams or loan sharks. 

Short term lending has been regulated by the Financial Conduct Authority (FCA) in the UK. 

Hugo Anglesford of Doddler commented: “Short term loans can be a great option for suitable and eligible candidates. Crucially though, before you actually proceed to borrow any money you should have a clear idea of how much you want to borrow and over how long. For example, do you need a £400 loan over 6 months or do you perhaps need something larger like a £2,000 loan over a longer period. Understanding this will help you choose your loan more sensibly.”

What Are The Regulations On Short Term Loans In The UK?

As mentioned, there are certainly regulations put in place by the FCA in the UK in order to give borrowers a chance to pay back their short term loans. 

Some of the regulations put in place for short term loans in the UK include:

  • Authorisation Required – First of all to even become a lender for short term loans in the UK, you must have authorisation from the FCA. This is a lengthy process and it can be hard to be accepted by the FCA. It will also cost the business money to do such an application. 
  • Price Cap – In 2015, the FCA introduced a Price Cap on all short term loans. This is a daily price cap of 0.8%, equal to £24 per £100 borrowed in 30 days. This means that borrowers will not have to pay back double what they borrowed for short term loans. 
  • Cap on Defaults Charges – The FCA also put a regulation in place that borrowers cannot be charged more than £15 for a default fee if they do not pay their short term loan back on time. 
  • Affordability Checks – Due to FCA regulation, every lender must carry out a strict affordability check of the borrower before they lend the money. This ensures that the borrower can pay back the money without any difficulty. 
  • Price Transparency – All lenders must now clearly state a representative example and APR next to any call-to-action on their website and offline marketing material.
  • Price Comparison Website – Lenders must also make sure that their offers are on price comparison sites and there is a link to a place to compare short term loans on their website.

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