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Payday loans vs overdrafts

payday loans vs overdrafts
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We all know that payday loans involve excruciatingly high interest rates and are really best avoided. So is it payday loans vs overdrafts or should we shop around for an alternative? Those finding themselves a bit short of cash at the end of the month often opt for dipping into an overdraft rather than paying over the odds for a payday loan. However, this may end up costing more than you’d think.

Changes to overdrafts

Over the past couple of years many banks and building societies have changed the way they charge for overdrafts, ditching the traditional annual percentage rate in favour of a daily fee. Campaigners say that daily fees are more expensive and mask the true cost of borrowing from an overdraft. Banks on the other hand argue that the new system is easier for customers to understand.

How much will it cost?

Taking just one bank as an example, Halifax currently charges its customers £1 per day to dip into a planned overdraft of up to £1,999, rising to £2 a day for amounts over £2,000 and £3 a day for £3,000 or more. Using an unplanned overdraft costs customers £5 for each day they remain overdrawn. A study by Which? showed that Halifax customers with an agreed overdraft of £100 for a month will pay £30 in interest. For comparison, borrowing the same amount for the same length of time from payday lenders Quickquid or Wonga would cost £20 or £37 respectively.

Competition

Which? executive director, Richard Lloyd, believes that competition is key to making credit fair and easy to understand. He said: “The government and regulators have rightly focused on the scandal of payday lending, but they must not lose sight of the urgent need to clean up the whole of the credit market. High street bank overdraft fees can be just as eye-watering as payday loans. Consumers need the credit market to work competitively. It’s time to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they’re using.”

Tougher rules

Payday loans vs overdraftsNew rules took effect on the 1st July 2014 for payday lenders and other short-term lenders offering high interest rates. Restrictions have been put in place on the number of times a debt can be carried onto the next month. These ‘rollovers’ can easily spiral out of control leaving the borrower with a crippling amount of debt. From now on loans will only be able to rollover a maximum of twice. The use of continuous payment authorities (CPAs) or ‘recurring payments’ where companies have permission to take money from a customer’s debit or credit card has also been limited. The Financial Control Authority has also ruled that all financial promotions by high-cost short-term lenders must include a prominent risk warning.

Best deal

If you do find yourself needing to borrow money to see you through to the end of the month, it is definitely worth taking some time to shop around. Working out the best deal available, whether from a payday lender or your bank, will save you money, meaning you’re less likely to need to borrow again the next month.

LenderLoan Amount
over 60 months
Representative APR%Cost 
£5,00015.9% APR £121.32 per monthApply
£5,00048.5% APR £222.76 per monthApply
£5,0006.9% APR £98.28 per monthApply
£300 over 65 days574.86% APR£136.51 per monthApply

 

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About Maria Brett

About Maria Brett

Maria is a freelance writer with over 10 years' experience producing content for a variety of publications and websites. When not working or looking after her two gorgeous sons, she can usually be found playing flugelhorn in a brass band, helping out at her local hospital radio station, shouting at the television while watching Formula 1, at the cinema or plonked on the couch with a cold glass of wine.

Website: Maria Brett

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