It’s always nice to have some savings ready for a rainy day. Unfortunately, life doesn’t always go to plan.
Big expenses can come out of the blue, surprising us when we least expect them. If you just don’t have the cash to buy a new washing machine, repair your car or pay for that costly school trip, then should you choose a payday loan or overdraft?
Payday Loans
A payday loan offers a short-term boost to your bank balance. You’ll borrow the money, then pay it back quite quickly. Payday loan terms are usually over 1, 2 or 3-month terms.
* When should you choose a payday loan?
A payday loan is suitable for a cash injection if you’re sure that you’re able to repay it. Look at your future income. Can you find the spare cash to repay your loan in time?
When you apply for a payday loan, it’s easy to see how much you’ll be paying back. Most lenders will also let you repay your loan early, to reduce your overall interest.
* When should you not choose a payday loan?
Payday loans have repayment deadlines. If you’re unlikely to be able to repay your debt in time, then it’s better to look at other sources of personal credit.
Overdrafts
* When should you choose an overdraft?
Overdrafts offer additional flexibility. They’re more suitable if you’re not sure exactly when you’ll be able to repay. An overdraft acts as an extension to your bank account. There are no repayment deadlines.
* When should you not choose an overdraft?
If you’re relaxed about repaying and need a little extra motivation to repay your debt, then an overdraft’s not such a good idea. With no repayment deadline, it’s easy to ignore. The costs can quickly mount up!
Borrowing £600 may result in daily charges of 50p, which over a month means that you’re paying more than £15. If you ignore your overdraft debt, it will simply grow and grow.
If you’re applying for a payday loan, you’ll only borrow as much as you need. Be careful with an overdraft – if you’ve got the option to spend ‘just a little bit more’, then strong willpower is required.
Comparing Costs and Charges
When you apply for a payday loan, there are some protections available.
Lenders cannot charge more than 0.8% of the loan’s total value in interest each day. You’ll also find that, even if you’re struggling to make repayments, you’ll never be expected to pay back more than double what you first borrowed.
If you borrow £300 from a payday loan provider, even in a worst-case scenario you’ll never be more than £600 in debt. In most cases, sticking to the repayment schedule will keep your costs much lower.
Before you apply, check the loan terms and conditions. Lenders will give you a clear explanation of how much interest you’ll pay, along with expected repayment dates.
A £300 overdraft at one of the UK’s leading banks will cost 75p per day, setting you back an additional £23 per month. Over 3 months, a £300 overdraft becomes a £370 debt.
A £300 payday loan may be more expensive than an overdraft over the same period, perhaps setting you back a total of £440. That makes a payday loan £70 more expensive, but, your payday loan has strict repayment deadlines and will be gone completely after your third month has finished. Your overdraft has the potential to continue growing, adding an additional £23 for every month that you let it continue.
Also, bear in mind that unauthorised overdrafts can cost significantly more than arranged ones. Borrowing £100 without authorisation may leave you with charges of £35 for one month. Where as a Payday Loan over the same period will cost you £24 for one month
Summary
Years ago, payday loans built up a negative reputation. For many, it’s a reputation that’s hard to ignore. But, they’re not as bad as they first seem.
A payday loan brings predictability, with clear deadlines and monthly repayment dates. It’s also limited, ensuring that you don’t accidentally end up in enormously unmanageable debt, but used carefully and responsibly can be a cheaper option than letting your bank automatically charge you again and again.
Overdrafts offer flexibility, and may be cheaper for short-term borrowing, but can easily grow out of hand. They should only be an option if you’re careful with your money, and won’t let them get out of control.