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Should You Choose an Unarranged Overdraft or a Payday Loan?


For those in a tight financial spot in can be difficult to come to a decision on the best course of action.

If you’re unable to call on the assistance of close friends or family members in a time of a financial uncertainty, the most common options are going over your current account limit with your bank, incurring costs through an unarranged overdraft, or by taking out a payday loan.

When it comes to payday loans there has been quite a bit of scaremongering in the press over the last few years. There are, of course, a few bad apples within the lending industry, but a payday loan rather than an unarranged overdraft it might be a more suitable short term course of action to help pay the bills, or deal with an unforeseen emergency situation.

Let’s take a look at both sides and see which is better for your specific circumstances.

An agreement with a short term loan provider

A common concern regarding payday loan providers is that the interest applied to short term loans can be quite high. Payday loans are designed to be taken out and paid off in a short period of time, which is why those who don’t make their agreed payments can have their total to pay back increased, as interest is continuously added.


Interest is 0.80% per day (fixed).

Example: if you borrowed 265 over 11 days the interest would be £23.32, with the total to pay back £288.32.

When searching for the best UK payday loan providers you can find those offering reasonable repayment terms, costing you less than the costs associated with going over your overdraft limit with your bank.


Current account overdraft limits

With the current account you hold with your high street bank you’ll have an agreement in place that allows you to either enter a specific amount in your overdraft, or you won’t be entitled to go over your limit at all.

Sometimes if you are in need of a short-term borrowing facility you might just use the overdraft facility without prior agreement with your bank. This will cost you more than just the cash you’ve used. When compared with the lowest payday loan providers above, taking out £100 from an unarranged overdraft for a month can incur a cost as high as £90 with some high street banks.

Banks place high charges on informal overdraft usage, as it should always be a last resort for their customers. The ranges for bank charges from a Which? Survey in 2016 highlighted the range of charges for the amount and repayment time we’ve discussed as being between £20-£90.

Always be aware of the charges you could face if you enter an unarranged overdraft with your high street bank.

My Financial Broker offer responsible payday loans from £100 to £1,000 for new customers and £1,500 for returning customers. Our flexible short term loans can be taken for up to 5 months to cover unforeseen expenses such as an unexpected bill or a problem with a car. For more information visit our how it works page or you can apply for a loan today.