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Payday Loan or Overdraft?

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Which One Should You Choose?

Nothing worse than being a little short on cash. You need to pay those bills and there is another few weeks before next payday. What are your options?

Either you can delay paying those bills if you possibly can. Some people will call up their creditors like the utility companies and stall them for a couple of weeks, give them an excuse as to why payment is going to be a pay this time.

If you are adamant that you are going to pay the bills on time, then the three options that are open to you are:

  1. Credit Card
  2. Overdraft
  3. Payday Loan

This article is going to be about the difference between payday loans and overdrafts and which work out to be better value.

Most of us have had to struggle for money at some point in our lives. It is not a great place to be in, but it is a fact of living in our western societies where everything costs money.

When we need cash now there are a few quick solutions to get the cash when you need it the most. You can either dip into your bank account overdraft facility or alternatively you could consider taking out a short-term payday loan.

So, given the choice between the two which is better for you when your cash reserves are running precariously low. It is surprising to find out that payday loans are less expensive than some types of overdrafts.

If you don’t have an overdraft, or at least if you do not have an arranged overdraft facility then to arrange one just call your bank and ask them for an arranged overdraft. This overdraft will cost you for each day which you are overdrawn.

Payday loans charge daily interest of 0.8%. Which of the two options is the cheaper?

Which is cheaper? Loans or Overdrafts

There is a common misconception that overdrafts are cheaper and a better solution than a payday loan. There has been research carried out by well known publication called “Which” who discovered that payday loans were cheaper than overdrafts which had not been authorised by the bank.

There is no stigma attached to being overdrawn, no one even blinks an eye when they say that they are overdrawn. But as soon as they mention that they took out a payday loan everyone immediately assumes the worse.

This is because we can only presume that overdrafts are services which have been provided by the banks for many years and are commonplace. Offered by long establish national institutions like Lloyds, or Barclays etc people consider them to be almost respectable.

Whereas payday loans being the new kids on the block quickly assumed a poor name for itself because of initially very high interest rates, poor customer service and high late repayment fees.

Payday lenders have changed considerably since 2014 when the Financial Conduct Authority stepped in and limited the amount of interest a lender could charge for their loans per day (Currently capped at 0.8% per day). Also, a borrower will never repay more than double the original loan amount.

How is it than overdrafts could be more expensive than payday loans? Let’s look at some of the fees which banks charge their customers for overdraft facilities.

Overdraft Fees vs Payday loans

The following fees are for unauthorised overdrafts rather than authorised overdrafts that you have agreed with your bank.

  1. Halifax = £5 per day (Max of £100)
  2. TSB = £80 per month
  3. HSBC = £80 per month
  4. Lloyds = £80 per month
  5. Natwest = £6 per day

If you compare that to how much payday loans cost. If you borrow £100 over 30 days, you will be charged 0.8% per day interest. This works out at about £24 for the 30 days. This is just £124 for borrowing £100 over 30 days. A payday loan compared to an unauthorised overdraft which would be a lot cheaper.

Borrowing £100 from

  1. Halifax = £5 per day (Max of £100) = Cost of £100 loan would be £200
  2. TSB = £80 per month = Cost of £100 loan would be £180
  3. HSBC = £80 per month = Cost of £100 loan would be £180
  4. Lloyds = £80 per month = Cost of £100 loan would be £180

Unauthorised overdrafts as you can see are much more expensive than a payday loan.


It is plain to see that unauthorised overdrafts are much more expensive than payday loans, yet they have never received the same sort of negative publicity as payday loans.

When you open a bank, account make sure that you are clear as to the costs of unauthorised overdrafts and that you do not get yourself into financial problems.

More people are now realising that payday loans are much better value then unauthorised overdrafts and use them more often.

There is talk of placing a cap on the fees which banks can charge for their overdrafts. Doing this will be met with resistance since banks do not like to see their profits cut when charging such high fees to customers who go overdrawn is such an easy way to make money for them.

Customers are becoming savvier with new apps coming out which alerts them when they are about to go overdrawn so they can prevent those high fees being charged. And if they need to, they can find the funding they need by applying for a short-term loan.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors. and

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to