Bank Overdrafts vs. Payday Loans

If you’re a little short of money this month and are considering the best way to make your money last longer, its more than likely that you have to choose between going into your overdraft or applying for a payday loan. While it is arguably better to curb your spending habits and live within your means to avoid having to seek financial help from banks and payday loan companies, sometimes emergencies happen and life throws you a financial curveball that leaves you feeling stressed out about how you are going to afford to get through the month. We hope to reveal the truth behind whether choosing to go into your bank overdraft is more cost effective than getting out short term loans and the facts may surprise you!

It can be said that the majority of people in need of a little extra money for the month will think that going into their overdraft will be the best solution (that or using their credit card). However, research conducted recently by Which? has suggested that is it cheaper in many instances to take out a payday loan than it is to fall into an unplanned overdraft. While payday loans have, in the past, been given a bad name, it is interesting to see how the latest research will change people’s opinions, particularly when it has been revealed that some overdraft fees can accumulate to four times as much as that of payday loans!

Some banks have been revealed to charge anything from £6 to £10 a day for going into overdrafts that are unplanned. Other banks charge something along the lines of £80 a month for being in your overdraft too, which can add up over time. In comparison, the FCA has put rules in place to cap how much a payday lender can charge you per day in order to reduce the amount you have to pay back on top of what you have borrowed – banks on the other hand, are not required to do the same. So, considering your payday loan lender can only charge a maximum of 0.8% of what you borrowed a day and you borrowed £100, you will only need to pay back £122.40 as opposed to being charged £80 and making you £180 short the month after if you went into the overdraft in your bank!

With payday loans you are always made aware of the amount of interest you are going to have to pay back on the amount you choose to take on loan. Banks are trickier to keep track of as you often may not remember about the charges listed in your terms and conditions until you are unlucky enough to have to resort to spending into your overdraft. And, while planned overdrafts are cheaper, many regular accounts don’t come with them. Payday loans have become more affordable thanks to the FCA ruling that came as a result of previous debt problems that occurred as a result of uncapped interest rates. The cap enforcement has meant that payday loans could be considerably safer than bank overdrafts and could make for a more viable option when looking for a short term cash solution.

Generic advice is not a service regulated by the Financial Conduct Authority.


Which? Research Source