Overdrafts vs. instant payday loans – which is cheaper?
If you are looking for a fast cash injection, an overdraft or a short term or payday loan may be a consideration. So, what do you need to know about each option? And which one may be the most cost-effective for you?
Overdrafts and charges
If you have a bank account, there may be a constant temptation simply to overspend any limit, as and when the demand arises or even by accident without you being completely aware of what you are doing. If that becomes a habit – and you begin to rely on your overdraft for meeting even every day, recurring bills – trouble with debt might lie just around the corner.
In a post dated the 12th of October 2016, the charity Step Change warned that charges on unarranged overdrafts are “spiralling” and called for action from the Financial Conduct Authority (FCA) to introduce a cap on the fees.
The charity referred to research it had conducted to suggest that more than one and a half million people are in the trap of a never-ending cycle of overdrafts, which they use on a continuous basis to meet essential and emergency expenditure, making unmanageable debt a real possibility.
The Mirror newspaper also reported on the 24th of October 2016, that many bank customers are paying £45 in penalty charges every time they make an unauthorised overdraft or exceed any overdraft agreement, taking an annual average expenditure on fess alone up to some £225.
With some overdrafts as little as £100 attracting penalty charges of £90 over 28 days, overdrafts are often more expensive than other forms of short-term borrowing.
Unlike with an overdraft where you dip in to it and worry about the fees and charges afterwards, with a short term loan you need to consciously apply for any advance. You’ll know how much it will cost you and will have a date set for when it needs repaying.
This may be a more preferable way to get a cheap short term loan compared to an overdraft.
That isn’t to say that payday loans and other short term loans haven’t had their fair share of bad press – just as with overdrafts, they have.
But used responsibly, they can be useful, and in some cases, cheaper than an unauthorised overdraft.
How do they work?
Instant payday loans are typically available online and, if you are approved for the loan, you receive a more or less immediate transfer of the funds you have requested.
The amount you have borrowed, plus any interest charges and set-up fees, will need to be paid back on an agreed date/s – typically your next payday – or dates, if you are taking a short term loan that lasts for several months.
You remain in full control of the debt and, what is more, each and every application you make for a payday loan is accompanied by a formal check of your credit rating – which provides probably the best indication of whether you are going to be able to afford this particular debt.
Which option is suitable for you?
Only you can decide whether an overdraft or payday loan is the most appropriate solution for you. Do remember, however, that no matter which option you choose to borrow money, it will need to be paid back.