By Arnold Smith posted July 30, 2017
People struggle on account of financial emergencies. There are occasions when they have to spend more than expected in a matter of weeks but they realise that their bank balance is low. Some think in terms of bank overdrafts while others opt for payday lenders. Research done by https://www.badcreditsite.co.uk/ has shown recently that payday loans have come out cheaper in comparison with overdrafts in the United Kingdom.
Here are five reasons why payday loans work out cheaper than overdrafts in the United Kingdom –
When people contact their banks for overdrafts, they have to wait for approval in the first place and this may take time. Once the approval is granted, people have to pay daily interest charges and fees until they are out of the overdrafts. Payday loans offer quick solutions on short term basis and in the long run, the exorbitant charges levied by payday lenders still work out cheaper than the bank overdrafts.
New research has shown that many people have encountered problems thinking that overdrafts are the best solution for their financial emergencies. Yet, unplanned overdrafts have turned out to be more costly than the payday loans. This has come as a surprise to many people in the United Kingdom. Studies have shown that fees for unplanned overdrafts have been four times more costly than the interest charges of the payday loans.
Even at an annual percentage rate of 1509%, it has been found that payday loans have cost less than bank overdrafts. If a quick look is taken at the kinds of fees being charged by the banks to their customers for overdrafts, things become clear. For example, banks like RBS and NatWest are charging fees of £6 for each day that customers go into overdraft. This is for unplanned overdrafts that go more than £10. Banks like Lloyds and HSBC are charging £80 every month for being in overdraft. At the Halifax Bank, there is a fee of £5 every day with a maximum charge of £100.
It has been proved that banks are charging 650% more for unauthorised overdrafts when compared with charges for payday loans. For an amount of £100, the maximum that a payday loan could stretch in charges is £24 while the banks could be charging a maximum of £180. This indicates that the banks will be charging £156 more than it would cost for a payday loan. Charges for bank overdrafts will apply to a monthly billing schedule period and not for the number of days that the amount is borrowed for. So, customers could end up paying for thirty days and may spill over to two billing periods.
New rules that have been put in place by the Financial Conduct Authority (FCA) have put a cap on the amount payday lenders could charge every day. The highest amount they can charge nowadays is 0.8% per day. As a result of this ruling by FCA, payday loans have turned out to be more affordable for customers than bank overdrafts. This ruling has come into effect in January 2015. By capping the rates of interest, short term loans and payday loans have been made a more viable option for those people who are in dire need of cash in emergencies. The payday lenders can charge only so much interest for reducing the amount that has to be paid back over and above what has been borrowed. On the other hand, banking institutions are not needed to put a cap on their daily interest charges for overdrafts.
These reasons have made it clear that payday loans, despite being costly in terms of interest rates being charged by lenders, are still cheaper than the unplanned overdrafts. When used in a wise way, payday loans are still the affordable medium of bridging gaps that are brought about by unexpected expenses.
By James Smith posted July 30, 2017
Residents of the United Kingdom fall back on payday loans in times of financial emergencies, mainly to avoid spreading their hands in front of their family members or friends. They also want to avoid cutting back more on their expenses. In several cases, they end up applying for payday loans to pay back other loans.
FCA caps on interest charged by payday lenders has encouraged borrowers to use payday loans in comparison with other conventional loans – Ever since the Financial Conduct Authority caps on payday loans interest rates came into being a couple of years ago, borrowers have benefited. The new regulations cap the interest at 0.8% per day. Millions of borrowers have heaved a sigh of relief since then and are continuing to seek payday loans. The average payday loan is a short-term and a high-interest loan which is generally secured against the borrower’s pay cheque.
Rollover facility offered by payday lenders has also encouraged borrowers to go for payday loans – If a borrower is unable to repay the loan on the stipulated payday, he or she could request the lender to rollover the amount to the next period. It gives the borrower the much needed breathing time, despite further interest charges being added to the previous loan amount outstanding.
Payday loans are used by borrowers with poor credit rating as they struggle to get the much needed money from other sources – Almost forty per cent of borrowers fall into this category and they struggle to get the necessary cash infusion in order to take care of their debts. They like to avoid asking their family members or friends for money and they struggle to pawn or sell their personal items or assets.
They also fail in their attempt to apply to banks for loans or overdrafts or use tax refunds to pay for the sudden expenses. Payday loans become key financial tools for such people as they need fast cash to pay for unexpected expenses and manage shortfalls between their pay cheques. This has turned the payday loans industry into a multibillion-pound industry. A couple of years ago, a survey done in UK indicated that there were more than two million payday loan clients. The Financial Conduct Authority also stated that in 2015, 1.6 million people in UK too out around ten million pounds’ worth of payday loans.
The facility of applying online also encourages borrowers to use payday loans, increasingly – Today, many payday lenders are operating online. This works both ways as applicants can approach the website of the payday loan companies and file their applications. Once they are approved, the funds are transferred directly to the applicants’ bank accounts. Even at the time of collection of the loan amounts, there are direct withdrawal instructions given to the bankers of the applicants with continuing payment authority schemes in case of more than one installment for repayment.
Payday loans are appealing to young consumers – Young people have a limited understanding of how to manage their finances. They end up in high debts very fast. Payday lenders are always on the lookout for those consumers who are in regular high debt and who have a history of approaching high risk lenders. These young consumers also find that the processing of payday loan interest charges costs them a little less than the overall cost of credit card payments that are made late and also of bounced cheques and unplanned overdraft charges.
So, there is no denying the fact that many people regard payday loans as attractive solutions for emergency cash crunch in the United Kingdom.