Are payday loans cheaper than bank overdrafts?

With the Supreme Court’s recent ruling on unauthorised overdraft charges in favour of banks, payday loans may be a cheaper option than the ‘unfair’ (as branded by the Office of Fair Trading) overdraft charges.

Despite their legal victory, the banks may still be under pressure from OFT to offer a fairer deal to their customers but after the recent ruling issued by Supreme Court they are under no obligation to reduce these charges. This could mean that unauthorised overdraft charges of up to £25 per day charged by some banks are set to remain and going in the red for a few days could cost you an arm and a leg!

Are payday loans a better deal? Doing a quick survey on five payday loan companies including top payday loan providers: paydayuk, paydayexpress and quickquid, show that the average cost per £100 borrowed is £25, with a repayment term within 30 days. Although in APR terms this would mean near 1700% but this is a relative annualised figure and not the true cost of borrowing.

Comparison test: Lets take the empirical evidence. If you needed £200 till your next payday in say 15 days, unauthorised overdrafts would charge* as follows: Lloyds would cost £330 (£22 per day ), Barclays £66 (£22 per 5 days) plus £8 per returned transaction and RBS would cost £110 (£20 maintenance and £15 per day to a maximum of £90) plus up to £15 per returned transaction.

A payday loan would typically cost around £50 for borrowing £200 and of course, this would also prevent you from paying the extra charges for returned items for which banks charge.

The result: If you have an urgent cash requirement, a payday loan may be a cheaper solution than letting your bank account go into the red with an unauthorised overdraft. As a general note it may be worthwhile putting money aside each month for a rainy day. This would be the best solution to any unforeseen cash problems.

*Based on rates and charges published by these banks at the time of writing.