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A Closer Look At Payday Loans And Bank Charges

It can be hard to understand the true cost of borrowing. This isn’t just about comparing the APR (Annual Percentage Rate) that is attached to lending products -- it’s also about knowing what is best for your situation at any given time.

The APRthat is given to a loan was set up so that you, as a consumer, could compare loans on a ‘like for like’ basis. So, if you compare two personal bank loans on an APR basis and one has a rate of 6.6% and one has a rate of 8% then you can easily see which is the better value for money.

But, you cannot compare this kind of long term personal loan with a payday loan in the same way. Personal loans are generally set up to last for at least 12 months and payday loans for an average of 30 days. So, an annual comparison rate doesn’t necessarily give you a true indication of value for money here.

There has been some negative press over payday loans. You might already have seen it. The press reports here compared the APRs on other loan options with those on some payday loans and the payday loans came out a lot higher. This may have put you off looking at a payday loan as a solution that could suit you but you may not know the whole story yet.

Problem is, this comparison rate led a lot of people to think that it would be better to rely on their overdrafts and credit cards to get a short term cash fix rather than take out a payday loan. For some people this simply actually led to higher costs, even though the APRs on payday loans were higher than those quoted on their overdrafts.

Let’s say, for example, that you have a huge gas bill next month. This wipes out your disposable income and you’re going to find it really hard to manage until you next get paid. Your choices are to carry on taking money out of your bank or to take out a payday loan.

With you can borrow £80 at a flat rate charge of £20. This £80 could well tide you over until payday at which point you pay us back and we’re all square. So, what would your overdraft cost you? Well, to be honest that is hard to say as rates vary from account to account but the average charge of exceeding an overdraft limit is held to be around £39 at the moment.

The major problem here is that your bank won’t necessarily tell you when you are close to your limit so it can be really easy to exceed it. Even if you are careful you could forget about a cheque that you sent off a few weeks ago -- when that bounces you’ll be charged another penalty fee.

And, if your need for cash causes a direct debit to be left unpaid then you’ll get another fee there. It doesn’t take long for these charges to mount up -- some people have gone just a couple of pounds overdrawn and ended up owing their bank over £100 in charges and penalty fees alone.

Look at it that way and £20 to borrow a bit of money for a few days or weeks doesn’t sound as bad as you might think. So, take a look at what can do for you next time you’re in a fix.