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Overdrafts more expensive than payday loans, says Which?

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Which? recently conducted a study into the cost of borrowing, looking at the different rates should an individual need to borrow £100 over 28 days.

Originally written By Brian Milligan (Personal Finance reporter) on 8 July 2016 at the BBC.

Borrowing money on an unarranged overdraft from your bank can be more expensive than taking out a payday loan, says consumer group Which?

Anyone who borrows £100 for 28 days from a payday lender now faces a maximum charge of £22.40.

But going overdrawn without agreement from your bank can cost as much as £90, according to Which?

Read the full story at http://www.bbc.co.uk/news/business-36746372
Copyright © 2016 BBC

Essentially, the findings were that due to the payday loan cap, a payday loan is often cheaper than an overdraft.

The big banks, such as HSBC, TSB and Lloyds charge up to £80 should you go into an unauthorised overdraft.

Royal Bank of Scotland (RBS) has some of the highest rates – in any thirty day period, you could be charged up to £90 for going into your overdraft, while Halifax customers could be charged a maximum of £100.

The fact that there is a cap in place on overdraft fees may come as a surprise, considering how high it is. With payday loans, which are notorious for having high interest rates, the cap actually works out cheaper in most cases.

Payday Loan Interest

In 2014, when the Financial Conduct Authority (FCA) was brought in, they discussed putting measures in place to cap the interest of payday loans. And in January 2015, this was put in place.

Payday loan repayments in total are capped to twice what you borrow, regardless of how long you borrow it for. This includes late payment charges too – so if you were the borrow £100, the maximum you’d ever pay back is £200.

But if you were to borrow £100 over 28 days, the maximum interest charge is 0.8%, so the most you’d be paying is £22.40.

“Payday loans are often cheaper than unauthorised bank overdrafts yet it is the payday loans that are often deemed the enemy. The truth is that when used wisely, payday loans can often be an affordable way of bridging the gap that unexpected expenses can bring about,” said Stephanie Cole from payday loan comparison site Readies.co.uk

Conclusion

While an authorised overdraft can work out relatively inexpensive, if you go into an unauthorised overdraft, it’s generally more expensive than a payday loan, which are commonly believed to be the most costly form of credit on the market.

Payday loans can be a good way to cover unforeseen costs, such as paying for car repairs or replacing an essential household appliance. If used responsibly, they don’t work out to be too expensive.

The trick is to only borrow what you need. Even if you can take out a larger loan, because you can afford to repay it, this doesn’t mean you should. Usually, the bigger the loan, the more interest you pay, as this is calculated from your original balance.

So if you only need to borrow £100 over a week, until you’re next paid, don’t borrow more for longer! With the payday loan interest cap, the interest on that loan would only be around £5.