Any credit card or debit card offers an overdraft facility in case you need any extra money. When authorised by your bank, the cost is around £6 per £100 you take out, however if it is ‘unauthorised’ the case can be huge – costing up to £70 to £100 for every £100 you borrow.
The interesting thing is that your overdraft starts working automatically, as soon as you go below £0 in your account. When authorised you can typically borrow a few hundred pounds as stated by your bank, but nothing stops you going beyond this to £200, £500 or £5,000.
Payday loans and constantly criticised for charging high fees, although this is to overcome the amount of bad debt and missed loans by other customers in the industry. However, bank overdrafts are significantly more expensive and are a lot easier to access by your local, trusted bank. Hence, the controversy.
The evidence of how expensive overdrafts can be highlighted in the Financial Conduct Authority (FCA) expressing a crack-down on the high-cost charges which are placed on overdrafts. The charges in question are seven times higher than the interest rates you will deal with when taking out a payday loan.
What is an overdraft?
An overdraft is an additional feature to your current account via your bank. Instead of seeking out independent credit, like a loan, you can borrow money directly through your own bank account and you are essentially borrowing from yourself. Not all bank accounts offer an overdraft as an option, however, but you could enquire about eligibility.
Overdrafts are typically designed for those who have a poor to non-existent credit score, and therefore are seen as the best type of credit for a student at university. University students can often get a free overdraft if they open a student account, this means they will not get charged if they go into or stay in the overdraft for an extended amount of time.
Where people get trapped is that they feel like an overdraft is a safety net which can be abused, since you are technically borrowing the money from yourself. However, this can result in spiralling debt and charges for staying in your overdraft too long.
How do you know if I am in my overdraft?
You can check to see if you are in your overdraft by logging onto your online banking or by checking your balance at the ATM. What you need to look out for is the minus sign in front of the total, this indicates that you are in your overdraft.
It can be confusing to some but the amount you have in your account ‘available’ will include your overdraft. For example, it may say £3,000 available, but £1,000 of that is your overdraft allowance and the actual positive money you have is £2,000.
As mentioned, if you go into your over draft, it will show up as a minus (e.g -£400). Whatever the displayed number is after that minus is what you have spent out of your over draft and what you now owe yourself to get back into positive numbers. Continuing with the example of -£400, say you receive a cheque for £1,000, your actual positive balance will now be £600 since £400 of the £1,000 will be used to pay back the overdraft.
What is a payday loan?
As previously discussed, pay day loans are actually cheaper than overdrafts as a rule thanks to the strict rules and put in place by the FCA for the payday loan industry, which currently limits the daily interest rate at 0.8% (previously the average rate per day was 1.0%)
A payday loan is a short-term form of credit, differing from the longer-term option of an overdraft. With payday loans, you apply for a certain amount of money and pay that back with interest attached – this can vary between lender to lender.
This type of finance does exactly what it says on the tin and requires you to pay back what you owe when your next pay cheque arrives into your bank account. Although the payday loan lenders we feature now extend their loans to 3,6,9 and 12 months.
When your loan gets approved, you should receive the amount directly into your bank account, usually within 24 hours of approval.
A payday loan is only truly cheaper than an overdraft if you pay it back in full and don’t keep taking out loans to pay back the last one. Therefore, if you do take out a payday loan, please make sure you pay it back in full and with the correct amount of interest which they have charged you. Make sure that this is feasible before you take the loan out in the first place. Failing to do this can only put you in a worse financial situation that you may have been in beforehand.
Also, you should make sure you are eligible for any applications you make as applying for too many loans can damage your credit score. If you have a bad credit score but want to take out a loan, there are specific lenders who will deal with such a request.