Will Payday Loans be Better than an Overdraft?

Often, we may have a dilemma when it comes to borrowing money. We may have several options in front of us and not really know which will be the best. This may be because we do not know lots about the different loan types, but it could also be because we are not really sure how to compare them. It is wise to look at a selection of things such as the following:

  • Cost
  • Repayment
  • Lender

There are lots of things that you could compare but these are probably the main ones and a good place to start out.


It is not always that easy to work out the cost of some types of loans. With a payday loan, there is often a calculator on the website and you will be able to put in the details, such as how much you want to borrow and how long for and it will let you know how much it will cost in total to repay it. This is very useful and you will have a monetary cost that you can compare with other payday lenders and you will easily be able to see which lender will be the cheapest.

With an overdraft the costs are harder to compare. You will have an interest rate, which will tend to be between 35-40%. This is a yearly rate and so if you borrow £100 for a year at 40% interest you will have repay £140 if you keep the loan for a year. However, it is very hard to predict how much you will borrow and how long for. This is because an overdraft is automatically repaid when money goes into your account, but if spend money form the account it will increase. This means that you are unlikely to owe one specific amount of money. Also, there is no pressure to repay it so you could keep the overdraft for a long time.

The only way to really compare the cost is to assume you keep the overdraft for the same amount of time that you have the payday loan and calculate the cost. However, it only works as a comparison if you are sure that you will repay it then even though there will be no pressure to do so.


As was touched above repayments are different with the different loans. With a payday loan you will need to repay the loan on the next day that you get paid. This will mean that you will need to be completely sure that you will have the money available. The loan will not last long, perhaps weeks or even days and you will need to pay it in full or else you will have extra charges. This means that you will not really have a choice but to repay on this day. The lender will even set up a direct debit so that the payment goes ahead on the right day. This means that you will not forget, which is good and ensures that it is paid. However, if you do not have the money available then it could cause you to go overdrawn or if you have no overdraft facility it will mean that you could have problems.

With the overdraft it will just repay when you put money into the account. This means that it could be repaid really quickly, when you next get paid just like the payday loan. However, this depends on whether you have the overdraft on the account that you are paid into. Also, there may be other money also coming out of the account and so the income may not be enough to cover those things as well as the overdraft. It is therefore rather more complicated.


There are also differences between the different lender. Some people like to use a lender that they have used before or one that they have heard of. Some like one that has a good reputation or that has been recommended by someone they know. It might be more specific things like you want good customer service, a company that has been established for a good few years or something like that. It is a good idea to have a think about what you want from a lender and then you will be able to match up one with your requirements.

Therefore, it is not easy to say whether payday loans are better than an overdraft. It very much depends on what you are looking for in a loan and whether you can match that to one of these two loan types. It is also worth being aware that you may need a good credit record to get a current account that offers an overdraft facility but credit rating is not relevant for a payday loan, so that could be a big factor as well.

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