The term “high-cost short-term credit” (HCSTC) is central to how the UK regulates payday loans and similar forms of borrowing. This legal classification determines which lenders fall under stricter oversight and what protections consumers receive. Understanding how UK law defines HCSTC helps borrowers identify risky loans, understand their rights, and make more informed best payday loans uk financial decisions.
What Is High-Cost Short-Term Credit?
Under UK law, specifically the Financial Conduct Authority (FCA) rules, “high-cost short-term credit” refers to loans that are:
-
Unsecured, meaning they do not require collateral such as property or a vehicle.
-
With an interest rate of 100% APR or higher.
-
Repaid within 12 months or less.
These loans are typically designed to provide quick access to cash for emergencies or short-term expenses. However, because of their high interest rates and short repayment terms, they can become very expensive if not repaid on time.
Common examples of HCSTC include payday loans, cash advances, and short-term instalment loans that carry significant interest and fees.
The FCA’s Definition and Purpose
The Financial Conduct Authority (FCA) took over regulation of the UK payday loan industry in April 2014. Its aim was to bring order to a market that had become notorious for poor lending practices and debt spirals.
The FCA formally defines HCSTC as a credit agreement that meets the following conditions:
-
The credit is not secured on land or an asset.
-
The credit is to be repaid within a year.
-
The annual percentage rate (APR) is equal to or greater than 100%.
-
Charges and fees apply beyond simple interest, such as late payment penalties.
This definition allows the FCA to clearly identify and monitor payday lenders and impose tailored consumer protections that reflect the unique risks of these products.
Why the Definition Matters
Classifying a loan as HCSTC is not just a technicality—it triggers a set of strict consumer protection rules. Any lender that offers high-cost short-term credit must comply with:
-
Price caps on interest and charges.
-
Strict affordability checks to assess whether a borrower can repay the loan without hardship.
-
Clear communication about terms, repayment dates, and total costs.
-
Restrictions on rollovers and repeat borrowing.
Without this legal classification, these protections would not apply, leaving borrowers exposed to the kinds of predatory lending that existed before 2014.
The FCA Cap on HCSTC Costs
In 2015, the FCA introduced the price cap to protect consumers from excessive borrowing costs. The key limits include:
-
Interest and fees cannot exceed 0.8% per day of the amount borrowed.
-
Default charges are limited to £15 per missed payment.
-
Total cost cap: No borrower should ever pay back more than 100% of the amount borrowed in combined fees, interest, and charges.
These rules mean that if you borrow £100 for 30 days, you can never owe more than £200 in total, regardless of delays or added fees. This cap is one of the most significant reforms in UK payday lending history.
Which Loans Are Not Classified as HCSTC
Not all high-interest loans fall under the HCSTC category. The FCA specifically excludes certain credit types, including:
-
Credit cards and overdrafts (even if the interest rate is high).
-
Home-collected loans with longer repayment terms.
-
Pawn agreements secured against goods.
-
Logbook loans secured on a vehicle.
-
Buy now, pay later (BNPL) credit, though this sector is under increasing regulatory scrutiny.
These products may have their own rules and risks but are governed by different parts of the Consumer Credit Act 1974 or other FCA guidelines.
Borrower Protections Under HCSTC Rules
Because of the risks associated with HCSTC, the FCA ensures that consumers benefit from several layers of protection:
-
Affordability Assessments – Lenders must check income, expenses, and financial commitments before approving credit.
-
Transparency Requirements – The total cost, including interest and fees, must be displayed clearly before borrowing.
-
Limit on Rollovers – A loan can only be extended or “rolled over” twice.
-
Credit Reporting – Lenders must accurately report to credit agencies to help prevent over-borrowing.
-
Fair Treatment of Borrowers in Arrears – Lenders must treat struggling borrowers with forbearance, such as offering repayment plans instead of immediate collection action.
These protections aim to strike a balance between allowing access to emergency credit and preventing consumer harm.
The Broader Impact of Regulation
Since the FCA introduced the HCSTC framework and cost caps, the payday loan market has transformed. Many lenders unable to comply with the new rules left the market, while others adjusted their products to meet affordability and transparency standards.
As a result, the number of payday loans issued in the UK has declined sharply, but those that remain tend to be safer and more transparent. Borrowers now have better information about costs and repayment expectations, reducing the likelihood of long-term debt cycles.
Conclusion
UK law defines high-cost short-term credit to identify and regulate the most expensive forms of borrowing—mainly payday loans. Through the FCA’s rules, the law ensures that lenders act responsibly, disclose all costs upfront, and limit the total repayment burden on borrowers.
For consumers, understanding this definition helps distinguish between safe and risky lending options. While HCSTC loans may serve as short-term relief in emergencies, borrowers should always compare alternatives, read the terms carefully, and ensure they can afford the repayments before committing.
