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When it comes to managing your finances, every penny really does count. That’s why knowing what’s what with overdraft fees and payday loan interest is so important. Especially when an unexpected cost hits and you don’t have enough to cover that and your usual expenses until payday. There’s no denying that having a bank account with an overdraft can be useful. But the charges attached, especially to unauthorised overdrafts, can leave you worse off than you were before. So how do you choose whether to use an overdraft or take out a payday loan?
An overdraft is a facility provided by your bank, and comes as part of most bank accounts. An overdraft allows you to borrow money through your current account. Essentially, you can spend more money than you have in your account. An overdraft may come with your account automatically when you set it up, or you can request it from your bank later. There are two types of overdrafts:
Having an authorised overdraft attached to your account can be a useful safety net. It is especially useful when you have an unexpected expense to deal with. An unauthorised overdraft can also be useful in this respect, but as it is approved on a transaction by transaction basis, should not be depended upon and should only be used as a last resort. Either type of overdraft should really only be used as a short-term solution. If you slip into your overdraft regularly, the usage fees and interest could add up. In general, you should avoid using more than you absolutely need, to minimise the fees you pay.
Taking out a payday loan when you have an unexpected bill can sometimes be a more suitable option than an overdraft. While an authorised overdraft can be helpful for a relatively small sum of money, for larger sums or amounts that you would need an unauthorised overdraft to support, a payday loan could be a better option.
If you are using an overdraft, the amount you have borrowed will automatically be repaid when more money arrives in your account. This means you may have to keep dipping into your overdraft. It could be a long time before you’re back on track. With a payday loan, however, you’ll have a specific sum to pay back each month for a number of months. Payday loans are usually paid back over a period of between three and six months at a cost you’ll have agreed with your lender upfront. This makes it easier for you to plan your spending and avoid a lengthy cycle of overdraft fees and interest charges.
In Summer 2016, the BBC reported that the cost of using an unauthorised overdraft can be more expensive than taking out a payday loan.
Under FCA regulations introduced in 2015, the most someone who takes a payday loan of £100 for 28 days will pay in interest is £22.40. However, somebody using an unauthorised overdraft for the same amount and duration could face fees of up to £90. This is a substantial amount of money!
The way payday loans allow you to pay back a certain amount a month – and often save on interest if you repay early – means that in some situations they may be a more manageable option.
Whichever option you choose to fund an unexpected expense, make sure you do your research first. You should also ensure you can afford the associated costs. When you’re already dealing with the unexpected, you don’t need any more surprises!
If you feel that a short term loan fits your needs, we are here to help. My Financial Broker works with a large number of loan providers, and do all the hard work for you! We’re here to help you find the right loan.