How do Payday Loans compare with bank charges

Wednesday, June 13, 2012

How do Payday Loans compare with bank charges

Payday loans have come under a lot of criticism for their charges ever since they were first introduced in the UK in the year 2006.  This is because although the loans are for relatively small amounts between £50 and £1000, the rate of interest or APR charged are anything between 1737% and 5000%.  However, what is not as widely publicised is that in some instances, the rate of interest or APR charged by some banks is actually higher than those incurred using a payday loan.

Banks have a number of financial products available for their customers, ranging from personal loans, overdrafts, credit cards to debit cards.  All these methods are available for  their customers and it is safe to say that the rate of APR charged on each of these depends on how good the customer’s credit check is. The APR on a typical personal loan is around 8% and the APR on a debit or a credit card is around 17%, therefore, both of these options are less expensive than a payday loan.  



Overdrafts come in two forms, authorised and unauthorised overdraft.  An authorised overdraft is one that has been pre agreed with the lender and the typical APR for this is around 15%, however unauthorised bank overdrafts do not advertise their typical rates of APR.  This is because usually a lender will charge £25 daily for being even £1 over the agreed overdraft limit.  Therefore, a debt of £175 per week can be incurred.  This is a much higher rate of APR than the most expensive payday loan at 5000% APR.

In this scenario, it would actually be cheaper for an individual to borrow the money from a payday lender than using money from an unauthorised overdraft.  However, this is not an advisable plan of action either, as payday loans are also an expensive way to borrow money.  Therefore, the best thing would be to identify the cheapest way of borrowing the amount required, by getting advice from an impartial source, and following their advice.

It is true that payday loans are actually cheaper than unauthorised bank overdraft charges for some UK banks, as their charges are by far the most expensive.  Consumers should calculate the cheapest way for them to borrow the amount of money that they require before deciding the best course of action, rather than using money which is unauthorised or requesting a loan based on convenience.

Laura Susstance is an experienced content writer from the United Kingdom. Catch her on her own blog- Fast pay day loans review.

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