Bank overdrafts more expensive than payday loans

Borrowing money from your bank overdraft is more expensive than using payday loans, explains a report from consumer group Which?

latest news from the world of business and finance

The latest news from the world of business and finance for growth companies

Whilst payday loans are regularly criticised in the press for charging levels of APR that run in the thousands, the fees charged by the likes of Wonga and Quickquid are in fact less than what you pay with for an authorised or unauthorised bank overdraft from RBS, Santander, HSBC and other high street banks.

The cost of a payday loan was capped on 1st January 2015 to a maximum of £122.40 per £100 borrowed for a period of 28 days. This is still less than the £30 charged by authorised overdrafts and up to £90 charged for unauthorised overdrafts.

When using a credit card, you will be given a credit limit which is the amount you can spend each month and is based on your affordability, income and credit history. For instance, you can be given a credit limit of £4,000 per month and this is the maximum you can spend each month – and going over this will put you into your overdraft.

Depending on the credit card provider and your individual circumstances, you may be granted an authorised overdraft, which allows you to spend a few hundred or thousand over your credit limit with a chargeable fee for doing so.

However, if you have not been granted an overdraft, perhaps due to the credit provider or if you have a history of poor credit, you will go into an ‘unauthorised overdraft’ where the costs for using this can range from £30 up to £90 for a 28 day period.

Source: BBC

How bank overdrafts compare to other financial products

Using bank overdrafts is considered as ‘emergency lending’ where consumers need money quickly for a particular expense or they have no other access to finance.

Payday loans are commonly used for emergency purposes whereby borrowers solve an immediate shortage of cash flow with a loan of up to £1,000 which they receive in their account in one lump sum, usually on the same day of the application. This money is set to last them until their payday, when they receive their salary from work and can repay the loan and interest.

However, in terms of an emergency loan, a bank overdraft comes up considerably more expensive to use for a 28-day period, with payday loans and particularly credit unions offering a much cheaper option.

Based on borrowing £100 over 28 days:

  Source:
Credit Unions£1.00Which?
Guarantor Loans£10.30GuarantorLoans.com
Payday Loans£22.40Mr Lender
Authorised OverdraftUp to £30Which?
Unauthorised Overdraft£30 to £90Which?

Future plans to reduce overdraft charges

The overdraft facility is one of the main revenue generators for banks and credit card companies and generated over £1 billion for the industry in 2015. However, the Competition Market Authority (CMA) is putting pressure on banks to lower their fees and increase transparency.

This has included text message alerts sent to customer’s phones as soon as they reach their overdrafts, which has reportedly saved individuals over £100 million in the last year.

The CMA is working on a proposed price cap for bank overdrafts and this will be finalised in August 2016.

Comments (0)