WARNING: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
WARNING: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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How Overdrafts Have Become More Expensive Than Payday Loans

August 7, 2019

Banks across the UK, have 2 million customers on overdrafts, stuck in what we call the ‘generation of overdraft’ – as people opt for the banking service to make ends meet, repeatedly using it after paying it off the previous month. Without a doubt, using an overdraft over time will be costly, so much so, payday loans have become the more cost-effective alternative for that reason.

According to the Stuck in the Red report, unaffordable lending is an ongoing issue within the overdraft market and banks on the other hand often fail to support their customers on dealing with their debts. Overdrafts remain the second most common type of debt in the UK.

• Average overdraft debt amounts to £1,722
• 79% spend most of their overdraft on household expenses
• 54% spend their overdraft on food and other general living expenses
• 27% use it to cover their household bills

Types of overdrafts

Overdrafts come in two separate forms – one being arranged or authorised overdrafts and the other unauthorised, unplanned or unarranged overdraft. An arranged overdraft simply means that you have an arrangement in place with your local bank. And with the permission to withdraw a certain amount over what you have in the bank. According to Money Advice Service, it comes with a lower interest rate, its easy manageable without fear of additional charges.
In contrast, an unarranged overdraft means that individuals can withdraw more money out of their current account than they had in it, without an arrangement in place. The banks have charges in place for this outcome, often £30 or more for one day’s unauthorised borrowing.

How expensive are Overdraft and Why?

In fact, payday loans are the obvious alternatives. In January 2015, payday lenders were subjected to a charging cap by the Financial Conduct Authority (FCA). This cap restricts payday lenders charges to just at 0.8% interest of the amount borrowed per day (i.e. 80p daily interest on £100 borrowed). According to Which? , some high street banks’ overdraft charges have exceeded £90 on borrowing as little as £5.

Alex Neill, the director of policy and campaigns at Which? stated that:

“People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies.”

Conclusion

As shown above, it’s important to note that overdrafts, as well as payday loans, should be used accordingly. For purposes such as emergencies or unexpected finances. They should not be considered as long-term.

For that reason, we’ve produced an article called ‘4 Repayment Approaches to Help You Stay On Track’, for you to make smarter and more informed financial decisions. If you are wondering about obtaining a payday loan and don’t know the tools needed for a loan application – we have a short clip explaining what is required.

A payday loan from a company like LoanlineUK.net is not a long-term financial solution. However, it can help alleviate short term financial worries, only if there is a plan to pay it off, and a plan that doesn’t involve repeated use of payday loans.

Disclaimer – This article does not constitute advice and you should seek professional financial advice for yourself. This is a guide only. If you need any advice, you can turn to The Money Advice Service.

Loanline UK - Overdrafts vs Payday Loans

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How Overdrafts Have Become More Expensive Than Payday Loans



Banks across the UK, have 2 million customers on overdrafts, stuck in what we call the ‘generation of overdraft’ – as people opt for the banking service to make ends meet, repeatedly using it after paying it off the previous month. Without a doubt, using an overdraft over time will be costly, so much so, payday loans have become the more cost-effective alternative for that reason.

According to the Stuck in the Red report, unaffordable lending is an ongoing issue within the overdraft market and banks on the other hand often fail to support their customers on dealing with their debts. Overdrafts remain the second most common type of debt in the UK.

• Average overdraft debt amounts to £1,722
• 79% spend most of their overdraft on household expenses
• 54% spend their overdraft on food and other general living expenses
• 27% use it to cover their household bills

Types of overdrafts

Overdrafts come in two separate forms – one being arranged or authorised overdrafts and the other unauthorised, unplanned or unarranged overdraft. An arranged overdraft simply means that you have an arrangement in place with your local bank. And with the permission to withdraw a certain amount over what you have in the bank. According to Money Advice Service, it comes with a lower interest rate, its easy manageable without fear of additional charges.
In contrast, an unarranged overdraft means that individuals can withdraw more money out of their current account than they had in it, without an arrangement in place. The banks have charges in place for this outcome, often £30 or more for one day’s unauthorised borrowing.

How expensive are Overdraft and Why?

In fact, payday loans are the obvious alternatives. In January 2015, payday lenders were subjected to a charging cap by the Financial Conduct Authority (FCA). This cap restricts payday lenders charges to just at 0.8% interest of the amount borrowed per day (i.e. 80p daily interest on £100 borrowed). According to Which? , some high street banks’ overdraft charges have exceeded £90 on borrowing as little as £5.

Alex Neill, the director of policy and campaigns at Which? stated that:

“People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies.”

Conclusion

As shown above, it’s important to note that overdrafts, as well as payday loans, should be used accordingly. For purposes such as emergencies or unexpected finances. They should not be considered as long-term.

For that reason, we’ve produced an article called ‘4 Repayment Approaches to Help You Stay On Track’, for you to make smarter and more informed financial decisions. If you are wondering about obtaining a payday loan and don’t know the tools needed for a loan application – we have a short clip explaining what is required.

A payday loan from a company like LoanlineUK.net is not a long-term financial solution. However, it can help alleviate short term financial worries, only if there is a plan to pay it off, and a plan that doesn’t involve repeated use of payday loans.

Disclaimer – This article does not constitute advice and you should seek professional financial advice for yourself. This is a guide only. If you need any advice, you can turn to The Money Advice Service.