Are Payday Loans Cheaper Than Overdraft Fees?

Approximately half a million people take out a payday loan each month in the UK therefore there is a huge demand for this type of financial solution.  One of the biggest selling points that guaranteed payday loans companies often cite is that they are cheaper than overdraft fees.  Therefore we have looked into this statement to understand if it is actually true.

To determine the answer to this, it is necessary to look at guaranteed payday loan and bank charges a little closer.  The average APR of a payday loan is 1737% which on the surface seems pretty high.  This means that to borrow £100 would cost you £25 every month to repay at this level of APR.  However the payday loan product is intended to be a loan until your next payday, therefore the total cost of borrowing £100 is £25.  The APR does vary depending on which payday lender you choose, therefore the APR can be higher or lower.

Bank overdrafts can either be authorised or unauthorised.  Authorised overdrafts are pre agreed, for example a student overdraft of £1500 and unauthorised overdrafts are when you have not pre-arranged to borrow that amount of money from your bank i.e. if you go over the agreed limit.  In 2011, high street banks charged anywhere between £22 and £186 per month for unauthorised bank overdrafts.  Therefore there is a huge difference between the cost of an unauthorised overdraft of £186 and a payday loan cost of £25 and a payday loan is absolutely the best option.

It is worth noting however that the cost of authorised bank overdrafts is anything between £0 and £26 per month, but the average amount is approximately £1.69, therefore in this scenario an authorised bank overdraft is much cheaper than any other option.

Unfortunately there is a real need for all of these short term financial solutions thanks to the spiralling costs of household living.  It is also impossible to anticipate every potential monthly outgoing thanks to nasty surprises such as cars breaking down, vet fees or school trips, therefore the best thing to do is have a plan for this eventuality in the shape of an overdraft or short term loan.

In summary, the cheapest way to overcome a short term financial problem is to agree a secure overdraft with your bank.  However if like most of the UK population, you use this up without realising it or you indeed rely on it each month to meet all of your outgoings, then a guaranteed payday loan is much cheaper than borrowing a further unsecured amount from the bank.  All of these scenarios will vary depending on how much banks or payday loan companies decide to charge you for your loan as different lenders charge different amounts, therefore it is essential to familiarise yourself with percentage APR and other charges.  This illustration is the cheapest option based on average payday loan and unsecured bank overdraft charges, therefore is most likely to be the best solution for you.

For more information on how payday loans compare to other sources of short term borrowing, view our infographic