Overdrafts vs payday loans

I love my mobile banking app, it means that wherever I am I can check to see how healthy my current account looks and informs my spending decisions. For me, as a freelance digital marketer, there is nothing worse than seeing my app load and seeing that I am overdrawn on my account, somehow it always makes me feel disappointed that I haven’t been able to manage my money well that month, however, it does ultimately drive me forward in finding more work!

I always thought it was better to be a little overdrawn than to take out a temporary payday loan to cover costs until I next got paid but I recently spotted an article which amazingly revealed that a pay-day loan can actually be a good alternative to an overdraft for some people. I am lucky that I have an approved overdraft of £350 with my Barclays current account so if I accidentally go over for a few days I don’t get charged, however, the article explained that for people who don’t have an approved overdraft there can be steep charges associated with being in the red.

According to Which? who have undertaken research in this area some banks can charge you as much as £90 for an unapproved overdraft of £100 and the current maximum charge from pay-day loan companies like Vivus for a 28-day loan of £100 is only £22.40. I find this really shocking as I always considered payday loans to be a risky way of covering short-term debt with crazy interest rates but this research has made me reconsider my stance.

The main issue here is that banks would much prefer you to take out one of their loan options than go overdrawn if you don’t have a pre-approved overdraft allowance for your bank account, using the higher charges to put you off going into the red. RBS allows customers a £10 buffer, then charging £6 a day up to a max of £90 in any 30 day period whereas TSB, Lloyds and HSBC all charge up to £80. Shockingly some Halifax accounts charge £5 a day, up to a maximum of £100. According to the Competition and Markets Authority UK banks made £1.2bn from such overdrafts in 2014. That’s just crazy! The CMA has in fact called for regulation of this problem.

In response to this information, the banks have said that they advise their customers to arrange a pre-approved, planned overdraft facility for their bank accounts to stop these sorts of charges being applied. With such an account from HSBC the bank has said borrowing £100 for 28 days would only cost £1.40 instead of the £80 charge. Payday loans have been capped by the Financial Conduct Authority (FCA) since January 2015 and now appear to be a genuine alternative for people looking to borrow money for a short period.

Have you fallen foul of an overdraft fee? Let me know your story below.

 

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