Why do People take Payday Loans?

According to research conducted by the Competition Commission in the UK, nearly 60% of payday loan customers take payday loans in spite of having access to other alternatives. These findings are quite different from the general perception that says that only those who are rejected by mainstream lenders access payday loans. In this payday loan guide, we look at the reasons why people take payday loans and what alternative lending options are available.

Alternatives ignored by people in favour of payday loans

As per the survey, conducted by the Competition Commission payday loans are not the last resort for many people:

  • 60% people who participated in the research could have borrowed from friends and family
  • 27% could have taken a pawnbroker loan (a loan against a secure asset that the lenders can sell if they don't get repaid on time)
  • 20% had the option of a bank overdraft
  • 20% could have gone for a loan from a bank or a building society
  • 18% could have opted for a credit card
  • 17% had access to home credit yet they chose a payday loan
  • 15% people could have taken a loan from a credit union
  • 13% had a choice of borrowing through retail credit
  • 8% had access to both an overdraft and a credit card
  • 6% had the option of going for a Department for Work and Pensions (DWP) crisis loan or a social fund

Overall 78% of respondents could have used at least one of the alternative sources over payday loans. 60% of the people said they could have used at least one of the alternative sources other than friends and family. And 30% had access to at least two of the alternatives.

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Why would people reject the alternatives?

Below are some of the reasons why people don't choose the available alternatives.

Credit cards

When it comes to credit cards, people were afraid of unexpected charges (even though the most expensive credit cards are nowhere as expensive as payday loans). People associated credit cards with frivolous and wasteful spending, and saw them as something that cannot be easily controlled. In comparison, payday loans were perceived as being clear about repayment amounts, and also as being easy to control.


Some people have had a bad experience with an unauthorised overdraft, which is clearly more expensive than a payday loan, so they decided to go against an overdraft. People can perceive an overdraft to be expensive because of unplanned fees. Borrowers are afraid of hidden charges.

Bank loans

A lot of people don't go for bank loans are these are available only for large amounts of above £1,000. Also, the application process for bank loans is too long and some people don't want the long-term commitment of a bank loan. Many people disliked banks because of bad experiences in the past.

Friends and Family

The social stigma associated with borrowing from friends and family is a turn off for many people. When they are borrowing from friends and family they have to give an explanation for why the money is needed. This is especially true if they were borrowing for unnecessary expenditures. People can rely on friends and family members with better credit ratings for borrowing on their behalf.

Credit Unions

This alternative is not that well known. Those who were aware didn't like the fact that credit unions required an account to be set up in advance. They also found it slower to get a loan from a credit union as opposed to the speed offered by a payday loan.

For some of the conventional methods such as bank loans, credit cards and overdraft, people were also afraid of the consequences of not paying on time.

What's the attraction with payday loans?

Below are some of the points that draw people into taking payday loans despite the bad press and costly repayments associated with this type of borrowing. This is what people have stated:

  • Payday loans are a hidden type of borrowing with many benefits
  • You can get a payday loan without any justification or reasoning
  • There is no dependence on family members for taking a payday loan
  • Payday loans can be taken without informing partner or family
  • Payday loans are a quick fix with no long-term commitment
  • People perceived that payday loans had no impact on credit rating
  • Unlike mainstream debt sources, people had not heard of any coercive debt collection tactics for payday loans
  • The slider on websites of payday loan companies provides greater control to borrowers


Payday loans are both inherently bad and they prey on unsuspecting customers. They're bad in that they're expensive, the fees for everything are exorbitant, and because they feed into the "instant gratification" phenomenon that is fuelling a consumption driven country. Money now, responsibility later. Secondly, they prey on customers that are looking for a quick and dirty way out of a bad situation. I can fix it next month except you can't fix it and then the debt snowball increases and now is rolling down the hill even faster. All the advice, if possible, is don't get into a situation where you'd consider a payday loan.