Bank Overdrafts vs Payday Loans

Bank Overdrafts vs Payday Loans

If you’re a little short of money and are considering the best way to make your money last longer, it’s more than likely that you have to choose banks overdrafts vs payday loans.

While it is arguably better to curb your spending habits and live within your means to avoid having to seek financial help, 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. So, let’s find out which option is best for your financial situation.

What are Payday loans?

Payday loans allow you to borrow up to around £1,500 and the money will be deposited in your bank account usually within a few hours up to a day. But the annual percentage rate or APR (the standard way to measure and compare the cost of borrowing) is usually quite high. So, that is something to think about before deciding to take out a payday loan.

However, the payday loan interest is now capped. You shouldn’t pay back more than twice the loan amount. But payday loans can still be one of the most expensive borrowing options out there. One reason why taking the payday loan route could benefit your finances is that you could actually improve your credit score if you make all your repayments on time.

What are Bank Overdrafts?

An overdraft is a borrowing service offered by your bank on your current account. If you spend beyond the funds in your account you are using an overdraft to borrow from the bank. There are two types of overdraft. An arranged overdraft has a limit that either comes with the account or is agreed between you and the bank. An un-arranged overdraft, as you may have guessed from its name, either goes past the limit of an arranged overdraft or you don’t have an arranged overdraft in the first place. Either way, you pay far more to use an un-arranged overdraft, making this one of the costliest ways to borrow.

Overdraft charges can be notoriously difficult to understand and compare, which is a far from the ideal situation when the people needing the overdrafts are often stressed and short on time. Arranged overdrafts usually comprise interest and/or fees. Un-arranged overdrafts can come with a raft of daily, monthly and transaction fees that quickly add up. So, if you forget to repay or payback your overdraft, you’ll end up with a large sum of money to repay.

Overdraft Vs Payday Loans Fees

If you bank with NatWest and RBS, then you’re charged a fee of £6 per day, for going into an overdraft. It’s important to note that this is for unplanned overdrafts, not ones that are already agreed upon beforehand. This fee is for people that go into an unplanned overdraft by more than £10. At TSB, HSBC and Lloyds, they can charge you up to £80 a month for being in your overdraft. Over at Halifax, there’s a £5 per day fee, with a max charge of £100.

Bank Overdrafts or Payday Loans – Which One?

So, you can see that overdrafts can be more costly than payday loans. It may seem like an easy and convenient way of getting money, but unplanned overdrafts are very expensive. What’s more, it’s very rare that you’re told of these charges when you open a bank account. If you agree to have an overdraft, then you will know all the fees.

People that need one are often in a financial emergency where they’re desperate for money. In such a situation, it may be cheaper for them to borrow the entire amount they need (£500, £1000, or more, depending on the circumstance) rather than getting charged ridiculous bank fees. So, after weighing up your options which one do you think is best for you? Bank overdrafts vs payday loans?