When it comes to short term finance that you can get quickly, you have two main options. Either payday loans or an unauthorised overdraft. But which one is the better option? That's what this article is going to be exploring.
How do Payday Loans Work?
The application process for payday loans is now very simple. It can all be done online. And you will have very few questions to answer, in fact apart from personal details it is mostly going to be about your monthly salary. That's because it is with this information that payday lenders decide whether you can afford the loan or not. When you're approved, the money should get to your account on the same day you apply.
The way that the money is paid back is that it is taken out of your account when you've been paid next month. So it is all very simple, and there is only one payment to make as they take the interest at that point as well. There are many financial emergencies that can be dealt with in that way.
How Unauthorised Overdrafts Work
The difference between a normal overdraft and an unauthorised overdraft is whether you have arranged for the service or not. It is not, of course, going to be without the banks knowledge that you have this service available so it isn't unauthorised in that sense.
The advantage to the bank of having people take money out with an unauthorised overdraft is that really they can charge whatever they feel like as they haven't given authorisation for it. This means that you usually get charged every day that you are in overdraft.
How Fast?
One of the most important parts of short term loans is how fast you can get them, as in an emergency speed is often very fast. As mentioned, with a pay day loan you are certainly going to be getting the money fast, usually on the same day.
Really though, there is nothing that is going to be able to beat the unauthorised overdraft in terms of speed. After all there is absolutely no delay, the money is effectively in your account the whole time. So if you can't even wait a few hours, or even minutes in some cases, then you might have to use the overdraft.
Which is Cheapest?
The biggest difference between the overdrafts and payday loans then, as there isn't that much difference in how fast they are, is going to be in the area of cost. That's how most people are going to make the choice between them.
Pay day loans tend to get a lot of flack because people feel that their interest rates are too high. However, that's generally because they are looking at the APR which measures how much you would have to pay in a year. You're supposed to pay it back in a month though, so that's not a very good guide to how expensive they are.
If we compare the APRs between these two sorts of short term loans though, that could be instructive. It's not a very fair way of judging either, but it can be used as a good comparison to show which is more expensive.
The APR on unauthorised overdrafts does not have to be displayed because it is not technically a loan. However it has been calculated, and for one bank it was found to be 46,000,000%. That's 46 million. In comparison, pay day loans only have an APR of something over 1000%. Here then, the payday loan clearly wins.
With that said though, as long as you pay off the overdraft within a day or two, you will probably find that to be the cheaper option. After all the pay day loan has to last for a month, so you will have to pay a fixed amount based on that. Unless you only need an extremely short term loan though, the payday option is going to be preferable.
How do Payday Loans Work?
The application process for payday loans is now very simple. It can all be done online. And you will have very few questions to answer, in fact apart from personal details it is mostly going to be about your monthly salary. That's because it is with this information that payday lenders decide whether you can afford the loan or not. When you're approved, the money should get to your account on the same day you apply.
The way that the money is paid back is that it is taken out of your account when you've been paid next month. So it is all very simple, and there is only one payment to make as they take the interest at that point as well. There are many financial emergencies that can be dealt with in that way.
How Unauthorised Overdrafts Work
The difference between a normal overdraft and an unauthorised overdraft is whether you have arranged for the service or not. It is not, of course, going to be without the banks knowledge that you have this service available so it isn't unauthorised in that sense.
The advantage to the bank of having people take money out with an unauthorised overdraft is that really they can charge whatever they feel like as they haven't given authorisation for it. This means that you usually get charged every day that you are in overdraft.
How Fast?
One of the most important parts of short term loans is how fast you can get them, as in an emergency speed is often very fast. As mentioned, with a pay day loan you are certainly going to be getting the money fast, usually on the same day.
Really though, there is nothing that is going to be able to beat the unauthorised overdraft in terms of speed. After all there is absolutely no delay, the money is effectively in your account the whole time. So if you can't even wait a few hours, or even minutes in some cases, then you might have to use the overdraft.
Which is Cheapest?
The biggest difference between the overdrafts and payday loans then, as there isn't that much difference in how fast they are, is going to be in the area of cost. That's how most people are going to make the choice between them.
Pay day loans tend to get a lot of flack because people feel that their interest rates are too high. However, that's generally because they are looking at the APR which measures how much you would have to pay in a year. You're supposed to pay it back in a month though, so that's not a very good guide to how expensive they are.
If we compare the APRs between these two sorts of short term loans though, that could be instructive. It's not a very fair way of judging either, but it can be used as a good comparison to show which is more expensive.
The APR on unauthorised overdrafts does not have to be displayed because it is not technically a loan. However it has been calculated, and for one bank it was found to be 46,000,000%. That's 46 million. In comparison, pay day loans only have an APR of something over 1000%. Here then, the payday loan clearly wins.
With that said though, as long as you pay off the overdraft within a day or two, you will probably find that to be the cheaper option. After all the pay day loan has to last for a month, so you will have to pay a fixed amount based on that. Unless you only need an extremely short term loan though, the payday option is going to be preferable.
About the Author:
There is a lot more to learn about payday finance and John Ward, an authority on the topic, has written about it in detail at Payday loans .
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