Avoiding debt traps: overdrafts, BNPL, payday loans and loan sharks

When money is tight, borrowing can look like a quick fix. Some borrowing is manageable; some is designed to keep you paying. This lesson builds on 'Loans, overdrafts and Buy Now Pay Later' in the Banking and Credit module, with a student focus.

Student overdrafts: useful, not free

• MoneyHelper explains that in the UK you can usually apply for a student overdraft after you turn 18, normally with no interest while you study, after a credit check.
• Limits are typically GBP 500 to GBP 3,250, and some are 'up to' amounts, so you could be offered less.
• MoneyHelper's warning: 'it's not free money.' Every pound you spend must be repaid.
• After graduation the account usually becomes a graduate account and the interest-free limit shrinks each year. MoneyHelper advises checking when interest starts and budgeting to repay before then.
• If you leave your course early, the bank will typically convert the account to a standard one, which usually means overdraft interest applies.
• International students should ask banks directly: eligibility for student accounts and overdrafts varies by bank.

Buy Now Pay Later (BNPL)

• BNPL splits a purchase into instalments, usually with no interest, but late fees can apply if you miss a payment.
• In the UK, the FCA began regulating BNPL on 15 July 2026. Lenders must check you can afford to repay, tell you the late fee before you agree, and contact you if you miss a payment.
• If something goes wrong, complain to the lender first, then to the Financial Ombudsman Service if you are unhappy with the response.
• Student rule of thumb: never use BNPL for everyday items like food, clothes or takeaways. If you cannot afford it this month, plan to save for it.

Payday loans: why they hurt

• nidirect warns that payday loan rates above 1,000 per cent APR are common.
• UK rules cap costs: interest and fees cannot exceed 0.8 per cent of the amount borrowed per day, default fees are capped at GBP 15, and you can never repay more than double what you borrowed (a 100 per cent total cost cap).
• Worked example: borrow GBP 200 for 30 days at the 0.8 per cent daily cap. Charges could be up to GBP 1.60 a day, or GBP 48 over 30 days, so you would repay up to GBP 248.
• A cap is a limit, not a good deal. If you cannot repay on time, charges and default fees can quickly add to what you owe.
• Better first steps: your university hardship fund or money advice service, a conversation with family, or an arranged overdraft if you can repay it.

Loan sharks: illegal and dangerous

• A loan shark is an unlicensed lender. Stop Loan Sharks (England) lists warning signs: a quick loan with no paperwork, a lender who seemed friendly at first, extra charges or very high interest added, threats, and a lender holding your bank card, passport or other valuables.
• Loan sharks sometimes target students through social media, group chats or 'friends of friends'.
• Stop Loan Sharks tells borrowers: you are not alone and you have done nothing wrong. Its free, confidential 24/7 helpline for England is 0300 555 2222.
• Never hand over your passport, bank card or student ID as 'security' for a loan to anyone.

If you are already in debt

• Do not ignore letters or messages. Contact the lender early and ask about a repayment plan.
• MoneyHelper suggests prioritising the most expensive debts while keeping up minimum payments on all others.
• Get free, confidential advice. In the UK, StepChange offers free debt advice online and by phone (0800 138 1111), and your university money advice team can help.
• Avoid any company that charges a fee to 'fix' your debt when free advice is available.