Sometimes, badly arranged overdrafts can be more expensive than payday loans when it comes to borrowing money. This is particularly true in the short term. it is seen that a few high street banks charge up to four times the maximum interest that is on a payday loan. The fees on overdrafts are also higher, to the point where it can pinch the borrower’s capacity to repay.

Overdraft fees vs. Payday Loans

For people who have used payday loans before, they are always made aware of all the rules and regulations before taking out a payday loan. Regulated and licensed payday lenders operate with a high amount of transparency because we want our clients to understand the benefits as well as the risks associated with short-term loans. It can be argued that when it comes to overdraft fees, the level of transparency and standardized regulation is a bit less. Banks are instructed to set up their own cap on the unauthorized overdraft charge payable par month. They have responded by arguing that unplanned overdrafts are clearly designed for the occasional over – spend and not for actual borrowing or a loan. They also reminded regulators that any overdrafts that are persistent for a longer period of time are not representative for normal account behavior.

When it comes to comparing overdrafts to payday loans, both technically operate in the credit market for short term loans. It is proven that some payday loans are much cheaper compared to overdrafts as long as they are paid back according to their terms. It is important to note that neither payday loans nor overdrafts are solutions to persistent financial shortfalls. The two options are only to be used when a cash crunch event occurs.

Understanding The Fees

It should be noted that fees for payday loans are dependent on the loan amounts, while the fees for overdraft protection generally is standard and independent of the amount. Even though payday loans and overdrafts are structured differently in terms of pricing, they can be regarded as partial substitutes. There is a notion that overdrafts have fixed fee to avoid the regulatory scrutiny. The average national price in 2016 came to $27 for every overdraft. In contrast, payday loans are priced differently for every province. For example, there is a $15 fee for every $100 borrowed in Alberta. Despite payday lenders often being vilified for high rates, sometimes payday loans can become considerably cheaper than overdraft credit when it comes to small dollar amounts.

Cost of Payday Loans

Payday loan fees are generally cheaper compared to overdraft protection fees when it comes to small denominations. Depending on the overdraft amount, the overdraft credit can be much pricier compared to payday loans. According to financial study, it was seen that in the areas where payday loan locations are present, there is a reduction in overdraft protection taken at the banks in those areas. This behavior shows the relation between payday loans and overdrafts.

It is observed that small over – drafters who are disadvantaged by the high fixed pricing of the overdraft credit promptly switch to payday loans if they are available. Fixed pricing of overdrafts plays an important role because this kind of pricing discriminates against the small dollar and frequent over – drafters.