We are led to believe that traditional high street banks offer the best rates for customers who need to borrow. This may be true for borrowing larger amounts of money, but if you need access to smaller amounts of cash quickly, then banks don’t always offer the best terms. So is it better to borrow from a bank or an online lender? We look at the facts.
Personal Overdrafts
If you are short of money, and are waiting for your next pay cheque, then dipping into your banks overdraft facility might be necessary. However, to do this you will have had to organise an overdraft facility with your bank, which basically gives you permission to borrow. You pay an average annual interest rate of almost 14 per cent for using an authorised overdraft facility, and the bank can withdraw it any time, but it allows customers to dip in and out of it when funds are short. For customers with poor credit, however, who are denied an authorised overdraft facility, this may not always be possible, and that’s when the danger can occur. Spending money you don’t have by using an unauthorised overdraft can be very expensive indeed.
Unauthorised Overdraft
If you write a cheque or make a card payment when you have insufficient funds in your account, then you will be charged. However, it is also possible to fall into the red without an authorised overdraft facility in place, and that’s when things get expensive. Recent research reveals that spending money with an unauthorised overdraft can cost more than even a payday lender. Charges for using an unauthorised overdraft very according to the bank, and can be complex, but the independent Money Advice Service has calculated that you can be charged more than £100 per month.
Unauthorised Overdraft Fees and Costs
Banks usually charge a flat fee for going overdrawn, plus daily charges, plus interest. To simplify the confusing and variable charges made by banks, on average they charge as much as £5 per day for using an unauthorised overdraft, which is the equivalent of £150 per month. Worked out on as an APR, the typical cost of an unauthorised overdraft is around 1,500%. However some banks charge as much as 3,400%.
Short Term Loans
To conclude, a short term loan can be arranged for less than the cost of an authorised overdraft. If for example, you worked out the cost of borrowing £200 for one month using an APR rate, over a year the APR works out to be a great deal cheaper than bank charges for an unauthorised overdraft. The important thing to remember though, is that this is only if the loan is not rolled over, and is paid off at the end of the month. Continually rolling over loans to repay them a later date will only accrue massive debts.