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The truth about payday loan fees compared to alternative loan charges

Posted on by Laura

There has been a lot of speculation around the payday loans industry ever since it exploded in the UK.  There is a general perception that they are an expensive way to borrow money and that other types of short term loans like overdrafts or credit cards are more favourable.  This however is not necessarily the case as you will see in our example below as depending on your individual circumstances, payday loans can work out cheaper.

This case study will look at an individual ‘Peter’ who wants to borrow £100 at the cheapest possible rate.  Peter wants to look into the different short term borrowing options that are available to him.  There are four realistic options, payday loans, an authorised bank overdraft, an unauthorised bank overdraft and a credit card.  To determine how much it will cost Peter to borrow £100 from each of these lenders, he needs to calculate the following:

  • The interest rate against the loan of £100
  • The length of time he will repay the loan – one week for this example
  • Any additional hidden charges
  • The total cost of borrowing and repaying the loan of £100

Payday Loans

  • The average APR of a payday loan is 1737%
  • Payday loan terms mean that Peter must repay the loan within 30 days
  • This means that to borrow £100 would cost Peter £25 to repay at this level of APR
  • The total cost of the loan is £125
  • Some payday lenders charge for additional services, however there is enough competition in this industry that Peter can choose a lender with no additional charges

Bank Overdraft –Unauthorised

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.

  • Unauthorised bank overdrafts must be repaid asap i.e. one week
  • The average amount of money charged per week for an unauthorised overdraft is between £22 and £186 per month, an average of £104
  • The total cost of the loan would be £204

Bank Overdraft – Authorised

  • The cost of authorised bank overdrafts is anything between 9.9% and 19.9% APR.  The average of this is 14.9%
  • Authorised bank overdrafts can be repaid whenever Peter decides to make the repayment as he has agreed this with his bank
  • The average amount of money charged per week for an a £100 overdraft is £14.90
  • The total cost of the loan would be £114.90

Credit Card

  • The average APR of a credit card is 16.9%
  • The amount of money charged for the £100 loan is £16.90
  • The total cost of the loan would be £116.90

When you actually break down the cost for Peter to borrow £100 from each of these short term loan sources, the cost of payday loans actually looks reasonable.  It is the third most expensive solution out of the four examples, however there is a small difference between the top three solutions.  The one thing to note is that all these examples are based on making the repayment within one week and therefore every week that Peter did not repay the £100 loan would incur additional charges.

Payday Loans Charges

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Representative APR 1737% icon

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Chris needed to borrow £100 until payday. He applied here online and got his money within the hour. Chris repaid his loan when he got paid 28 days later at a total cost of £125.

Representative APR 1737% (variable*)

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