Dollar Financial UK, which owns brands including The Money Shop, Payday UK, Payday Express and Ladder Loans, agreed the compensation after a review by the Financial Conduct Authority (FCA).
The company apologised to those who "suffered difficulties".
It is the third-biggest repayment by a payday lender in recent years.
This follows FCA-led investigations by Wonga and Cash Genie.
The FCA said Dollar Financial customers may have suffered as a result of the firm's affordability checks, debt collection practices and system errors.
Compensation relates to the affordability of loans taken out in the year to April 2015, as well as the collection of repayments on loans taken out between January 2013 and the end of April 2015.
During this time - in July 2014 - the company agreed to review its lending practices and refund customers a total of £700,000.
Stuart Howard, chief executive of Dollar Financial since November 2014, said: "As the new CEO, I accept the findings of the review and apologise to anyone who may have suffered difficulties as a result.
"It is proper that we put things right where they have gone wrong and I have gone further than the review in reforming the way our business operates to reflect the company aim of being the most responsible lender in its marketplace."
Customers due compensation will be contacted by the company, including those who have moved address or whose bank account information has changed.
Some 65,000 will be given a cash refund, another 67,000 will have their current loan balance reduced and 15,000 will receive a combination of the two.
The company announced a string of redundancies and branch closures earlier in the year.
The compensation comes after lender Wonga said in October 2014 that it was writing off £220m of debts for 330,000 customers, and - in July - lender Cash Genie was faced with a £20m compensation bill after charging customers £50 to transfer them to the firm's debt collection business.
The move to review lenders' operations was welcomed by campaigners.
"Thankfully, we have started to see much greater scrutiny of the ways these dangerous businesses in this dangerous industry operate - and now their horrible practices are starting to catch up with them," said Guy Anker, managing editor at MoneySavingExpert.com.
Mike O'Connor, chief executive of StepChange debt charity, said: "Continuing action by the FCA to fix the payday lending market is welcome and I expect this will not be the last time we see action to redress losses to consumers.
"While the number of people coming to us with payday loan debt problems is falling, we continue to see problems with unaffordable lending and people struggling with multiple loans."

South Wales Police has arrested a 21-year-old man in connection with the incident at Kingsway just before 03:30 GMT.
Roads were closed for a time on Sunday morning to allow crime scenes officers to investigate.
The man's injuries were not life-threatening, said police.

A trailer was taken from Burton's Foods Ltd on Ty Coch Way, Cwmbran, Torfaen on 17 June.
The two men, from Liverpool and Cheshire, had been charged with theft.
A hearing at Newport Magistrates' Court heard a third man will appear in court in relation to the alleged theft on Friday.

The device was stolen during the band's concert at Sunderland's Stadium of Light on 25 May.
Northumbria Police found the phones at a house in Whitley Bay hours later after using a GPS locator app to find it.
A 25-year-old woman has been arrested on suspicion of theft.
Det Insp Dave Swinburn said the force advised concert goers to be "extra vigilant" and recommended smartphone owners install tracking software on their devices.
One of the UK's major payday lenders will refund £15.4m to 147,000 customers - many of whom were given loans they could not afford to repay.
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