While it’s important to be responsible in terms of money management, sometimes life’s unexpected twists and turns mean that we find ourselves in need of financial help from time to time. This can be in the form of a payday loan, credit card, overdraft or another financial service. So whether you need to fund repairs to a vehicle after an MOT, replace a broken washing machine or need to pay off an unexpected utility bill, it’s reassuring to know that there are several options out there for you to turn to.

However, it’s worthwhile doing a little bit of research to figure out what the best options are – do you opt for the same day payday loan or use an overdraft? Let’s consider the pros and cons of each:

Payday Loans or Overdrafts: Which Is Cheapest?

It’s a common misconception that an overdraft is the ultimate solution to temporary financial difficulties. Thousands of people think that being in the red is better than taking out a same-day emergency loan – however, research shows otherwise, which may come as a surprise.

For years, payday lenders have been scrutinised in the press. In fact, some banks have even been complicit in suggesting that it’s more affordable to turn to a high-street financial name in times of financial need instead of applying for an online payday loan. Despite this, a study undertaken by the consumer watchdog group Which? has highlighted the fact that unplanned overdraft fees can be up to four times more expensive than the interest charged on a payday loan!

Why are unplanned overdrafts so expensive?

It may come as a surprise to learn that unplanned overdrafts are more costly than payday loans – particularly when you look at the APR charged by most payday lenders. Look a little closer at what the banks charge, and it all begins to make sense.

Unplanned overdraft charges vary from bank to bank, although most currently charge in the region of £6 per day for being overdrawn, up to a maximum of £100 per month. So let’s say that you’re overdrawn by £100 – does it seem fair to have to pay an additional £100 in charges on top of this? Of course not!

FCA Regulated Payday Loan Charges

When you look at how little payday lenders are permitted to charge in interest in comparison to banks, it suddenly begins to make sense why the major high-street finance firms want to tarnish the idea of taking out a payday loan: consumers will receive a better deal, and the banks lose out!

This is because payday lenders are now strictly regulated by the Financial Conduct Authority (FCA). Under these rules, payday lenders can only charge interest of 0.8% per day. So when you compare being £100 overdrawn versus taking out an emergency payday loan of £100, you’ll repay just £122.40 with a payday loan, whereas your bank could charge you up to £200 in total for the same amount.

Of course, not all banks charge up to £100 per month for being overdrawn. For example, Barclays charge just £30 for a £100 unauthorised overdraft over the course of a month – but even as the cheapest and fairest in terms of overdraft fees, they can’t compete with payday lenders.

Overdraft or Emergency Loan: Which Is More Convenient?

As we’ve established, overdrafts can be much more costly than emergency loans. While an unauthorised overdraft might seem like a quick and convenient way of accessing cash when you need it the most, it’s worth reiterating: these forms of overdraft are incredibly expensive!

It might often be the case that these potential charges were never mentioned to you when you opened your bank account. If you’ve held the same bank account for decades, the terms and conditions regarding overdraft charges might have even changed without you being aware.

It’s incredibly easy to find yourself overdrawn and into an unauthorised overdraft situation, too. Sometimes, you might mistakenly think that you’ve got more money in your account. Other times, you might be aware that you’re going to be overdrawn. Still, the convenience of going into an unauthorised overdraft seems appealing in comparison to waiting around to be approved for a credit card or bank loan.

If this sounds familiar, perhaps you should consider just how quick it is to arrange for a same day payday loan. It takes less than five minutes to fill out an online form, and you could receive funds within the hour – it’s practically as convenient as dipping into an unauthorised overdraft, but at a fraction of the cost.

Beat the Banks With a Payday Loan

If you find yourself in the unfortunate position of unexpectedly entering an unauthorised overdraft, a payday loan could actually help. Let’s imagine the situation: you’ve accidentally gone £60 overdrawn on your high street bank account and now face charges of £6 per day, up to a maximum of £100 per month.

Instead of letting those charges mount up, you could take out a payday loan of £100 in as little as one hour. This will negate the need to pay up to £100 in monthly unauthorised overdraft charges. Instead, you’ll face a maximum of £22.40 in interest when it comes to making your payday loan repayment next month – and you’ll even have an excess £40 left to keep you in the black and tide you over until your next payday.

Conclusion

While it can be beneficial to have a small arranged overdraft with your bank for emergencies, it goes without saying that a payday loan is far more preferable to entering an unauthorised overdraft. Don’t get stung with ridiculous fees. Instead, take control of your finances with a payday loan where you can call the shots.

Most payday lenders allow you to take control. This means you can choose your repayment terms, allowing you to spread the cost over a few months if required. You’ll even have access to an online dashboard where you can pay back your loan early if you like, which could help lower the interest even further.

If you need an emergency loan, would like to find out more about payday loans or are looking to match with a suitable payday lender, why not take just five minutes to fill in our online form? As one of the UK’s premier payday loan brokers, we’ll ensure that you end up with the best possible deal.