Balancing the Different Costs of Payday Loans vs. Bouncing a Cheque

If you have never taken out a payday loan, you should know that there is a cost involved. Different lenders charge different amounts.

With that said, you should get to know a little more about payday loans and their uses before you make a snap judgment.

When determining whether or not to take out payday loans, you should first consider what could happen if you don’t. If you bounce a cheque, your bank may automatically tack on a £5 monthly usage charge for every month you are in overdraft status. Additionally, there may be an 18.9% interest charge, plus a daily fee of up to £10 (up to a maximum of eight days, or £80 total). Then add to that to any late fees and other charges from the party to which the cheque is addressed. It can add up to a lot of quid under just about any circumstance.

But a payday loan can help you avoid all such fees. Just to recap, a payday loan is money that you borrow in advance of your next paycheque, expected to be paid back at the time of your next payday. Consider this scenario:

• Borrow £100 at a cost of £29.50, five days before your next paycheque date
• Avoid five days of bank overdrafts (£50 – note the allowable maximum is eight of £80 per month)
• Avoid also at least a one month overdrawn usage fee (£5)
• With a payday loan, you would save at least £25.50

Not included in this calculation would be the extra cost of an 18.9% annual rate on the overdrawn amount (£18.90 if it is on £100 for a year).

Another important value is your time. Under the comfortable circumstances of working from home on your personal computer, you can apply for a payday loan in about five minutes. Confirmation of approval is also quick,^¶ and the money is deposited into your bank checking account in one hour or less.^§ Compare that to frantic time on the phone trying to block the overdraft and it's easy to see where your best value lies.

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