Bank Overdrafts vs Payday Loans. Which Option Is Cheaper?

Q: Bank overdrafts vs payday loans. Which option is cheaper? ~ Gemma, Sunderland.

Bank overdrafts are cheaper in most cases. This really depends on the amounts and the time period that funds are borrowed for. There is also a great variation between the overdraft charges imposed across most banks. The assumption is being made of course that you are accessing a planned overdraft (aka arranged or formal). If you do go into the red when it is unplanned, the fees are always going to be much more expensive than any payday loan. Since 2015 arrived, we have seen industry price capping in the payday sector that has helped to keep things simple on that side. The charges here can not exceed 0.8% per day.

The 0.8% rate for £100 is simply £0.80 daily. For a complete month (30 days) you’d pay £24 per £100 (0.8 x 30 = £24). If you were to access a £100 overdraft over 30 days then in most cases you’d pay between £0 and £8. There are more expensive options though. Barclays for instance would charge £22.50 (£0.75 daily). A few options actually exceed the noted £24 cap. Both Halifax and Santander would ask for £30 (£1 daily). Halifax do have a £50 buffer, but obviously this has been exceeded with our sampled sum. It always worth shopping around for banks that offer free overdrafts. First Direct for instance hand the first £250 for free.

They do charge a £10 monthly account fee, but they waiver this when you pay a £1000 wage in. There are also some competitive deals elsewhere such as with Yorkshire Bank who just impose 9.9% APR that calculates as £0.78. It is worth referencing the NatWest/RBS costs since they are a popular choice for current accounts. You pay a £6 usage fee there and 19.89% APR (£1.50) that creates a total monthly cost of £7.50. If you were to borrow £100 for 3 days (using a short term firm like Wonga) then £2.40 is obviously going to cheaper than the RBS option that will already have the £6 usage fee applied as well as added interest.

With RBS you may have also just accessed a lower amount such as £30. If you did then the value reduces and yet the same minimum £6 fee would be imposed. So bank overdrafts are more cheaper than payday loans, but a point worth raising is that with the loan you borrow for the month and then you repay it back. Alternatively, people have a habit of living in their overdrafts and so they are constantly feeding the banks money. One benefit with the banks however is that they generally make the funds available immediately once you have been approved. The payout speed with subprime lenders is typically 2 hours once approved.

You would also want to keep a look out for companies that are open 7/7. In the past there was a few firms that opened 24/7, but these have cut back their times such as QuickQuid and Wonga. Of this pair, Wonga stands out since they do allow customers to choose the exact loan duration that could just be a few days. You would hope in time that industry capping is also imposed on the banks especially when it comes to unplanned charges. Not too long ago I accidentally went into the red by £0.20 and didn’t notice for 5 days. As a result I was charged £5 daily and so was stung £25 for just £0.20!