Short term loans have received a lot of bad press in the past. Whether it’s due to their interest rates, approval rates of debt collection tactics – you’d be hard pushed to find a month in which short term loans weren’t in the headlines.
One thing that rarely makes the headlines anymore is unapproved overdrafts and the related fees. However, going into an unplanned overdraft is extremely expensive – even in comparison to short term lending like payday loans. Yet, it is short term lending that gets tagged with words like ‘irresponsible’.
Are Overdrafts Responsible?
Is it responsible for banks and building societies to allow consumers to dip into an unapproved overdraft? Let’s take a look at some of the figures.
Recently, payday loan interest rates were capped at 0.8% per day. This means if you were to borrow £100 over 28 days, you’d pay £22.40 in fees and charges and a total repayment amount of £122.40.
According to research from Which, borrowing the same via an unapproved overdraft could cost you £90 in fees and charges – that’s 4 times the amount charged by payday lenders!
Which found that the amount charged varied greatly from bank to bank, Barclays a fraction more expensive that payday lenders with charges of £29.75, whereas Lloyds, HSBC and TSB would each charge £80 in fees and charges.
Cash Short Fall
If you are experiencing a short-fall in cash towards the end of the month it would appear that payday loans are a better option that dipping into your overdraft. But is this cut and dry? Are there any alternatives that could prove to be cheaper?
One potential alternative is to ask your bank for a larger approved overdraft. Some banks will offer a free approved overdraft whereas some will charge a small percentage of the overdrawn balance. Either way this will be significantly cheaper than falling into an unapproved facility.
Another option is to take out a credit card. Whilst this may not be a particularly long-term fix to the issue, it may be a cheaper option. If you fear that you may struggle to make ends meet one month, you could choose to put a few purchases (such as fuel or food) on your credit card. Providing you clear the balance in full, you will not pay any interest.
Long Term Solution
Taking out a larger loan may provide a long-term solution to your issues. Borrowing a larger amount will allow you to clear all debt and organise it into one affordable monthly repayment. This will not only give you better financial control, but it will make budgeting significantly simpler.
If you do feel yourself struggling to make ends meet one month or for a few months in a row, you need to ascertain the root cause of the issue. To do this, collect bank statements from the past few months and highlight potential causes. Has your income been lower? Are spending more on fuel? Have you been spending more than you expected on socialising?
By identifying the root of the problem, you can start to implement contingency plans to avoid it happening again in future months. Perhaps you’ll need to be more frugal with your food shop, spend less on socialising or take on some over-time at work.
Knowledge is power – find the root of your problem and fix it.