Automated teller machine (ATM)

If you’re short of money then there are a number of alternatives that you can look to in order to help you out with your finances in the short term. However, borrowing money from friends and family or getting a cash advance on your wages isn’t always a possibility, which leaves many people turning to either a bank overdraft or a payday loan. With a lot of bad press against payday loans in the past and a lot of people falling unexpectedly into their overdrafts, it can be a daunting prospect to need either one. Here we are making a quick comparison to determine which may help you to decide whether a short term loan or an overdraft is best for your needs.

What Is An Overdraft?

An overdraft is essentially a deficit which was caused by a person spending or withdrawing more money than the account actually holds. These can be arranged with the bank in preparation when you know that money is going to be tight and you need a little more wiggle room. Banks will approve a particular limit based on your circumstances, and fees and interest rates will differ depending on the type of current account you have, how much of the limit you end up using and how long you use it for. An unarranged overdraft however, is when it is not agreed with the bank, and these face serious charges from entering it up until you get out of it.

Charges

A study in 2016 has shown that UK banks were charging approximately 12 times more than a payday loan for those who fall into an unarranged overdraft. This study showed that the cost of borrowing £100 for 28 days amounted to a huge £90 in charges.

The equivalent with some payday loan companies was a maximum of £22.40. In 2017, Which? found that fees for these unarranged overdrafts from banks are still at 8 times the cost of payday loans, and with a fifth of current account holders having unarranged overdrafts, these fees generated a staggering £1.2bn of revenue for banks back according to the CMA back in 2014.

As you can see from these figures, overdrafts that are unarranged are far more costly than payday loans, and this is because of the FCA caps on payday loan fees.

FCA Caps

One of the biggest changes in payday loan history was the implementation of a range of caps on fees, interest rates and more by the Financial Conduct Authority (FCA). This has made payday loans far more affordable, and these have been in place since 2015. Interest rates are capped at just 0.8% a day, and other caps ensure that borrowers never have to pay back more than double what they borrow.

Other caps include fees such as a default fee being capped at just £15 only to be paid once when a payment is missed. However, reports have suggested that due to the extortionate charges on overdrafts, the banks may be facing similar caps in the near future.

Here at LoanPig, we offer transparent and clear payday loans that provide you with help as soon as you need it when facing a financial emergency. You can tailor your short term loan to suit your needs by adjusting how much you would like and how long for. Then, we will carry out a number of eligibility checks to ensure that you can truly afford to pay back the loan amount that you require. The application process is simple and easy, and we will aim to match you to a lender as soon as possible. We want to find you the best possible loan based on your circumstances, so fill out our online form today!