How Does a Payday Loan Compare with an Overdraft?

If you are looking for money quickly then you may decide that you have the option of a payday loan or an overdraft. They are quite similar in some ways but different in others and it is worth thinking about these similarities and differences.

Amount you can borrow

The amount you can borrow will depend on how much a lender is willing to let you have. If you have borrowed before and repaid they may be more willing to lend you more money. A payday loan tends to be for up to £1000 but if you are a first time borrower they may only lend you a few hundred until you can prove that you are able to repay. With an overdraft it could be similar. Overdrafts can go into the thousands, but often they will be more modest. However, you can go beyond an arranged overdraft amount which would extend the amount that you could borrow.

Speed of arrangement

If you already have a current account, then you may have an overdraft arranged already. In this case you would have instant access to the money as you would if you chose to use an unauthorised overdraft. However, if you choose a payday loan then it will take some time to arrange. The loans tend to be very quick to organise though, some only taking a few hours and most within the same day, which means that it probably would not make that much difference which you chose with regards to time.

Credit rating

Payday lenders do not do credit checks which means that you do not have to worry about your credit record when you are applying for them. However, you will have one when you are being considered for an overdraft. You may find that if you have a poor credit record you may not be able to arrange such a high overdraft or you may not be able to arrange one at all. There may be the option of an unauthorised overdraft though.


Cost is a very important factor to consider. Payday loans do have a reputation of being expensive, but it can be possible for some loans to actually be more expensive. It is therefore really important to compare the costs really carefully. The payday lender should have a calculator on their website where you will be able to work out how much the loan will cost. You will need to know how much you are borrowing and how long for. With the overdraft, the costs could vary. Firstly, if you have an arranged overdraft it will be significantly cheaper than an unauthorised overdraft. The arranged overdraft may have a monthly fee as well as interest whereas an unauthorised overdraft could have a daily fee as well as higher interest. It is worth finding out. An overdraft also has no repayment schedule and so it will just be repaid when you pat money in. This means that it can last for a long time and this could make it more expensive overall. It is therefore important to calculate the costs of the different options and compare them, making sure that you take into account how long it will take you to repay.


The term refers to the length of the loan. This is fixed with a payday loan and tends to be a few weeks and with an overdraft it will last until you pay it off. Generally, the longer that you keep a loan, the more expensive it will be because you will be paying interest for longer. It can also be good to pay it off more quickly as you will be in debt for less time and being in debt can be stressful for some people. However, some people will find the stress of having to repay the payday loan within a few weeks quite difficult. Having to repay it as a lump sum means finding a large amount of money in one go and not only that but being able to cope until next being paid with significantly less money. This can be really difficult. With an overdraft, although it might be more expensive, there is a flexibility with repaying it, which means that there feels like there is less pressure. You will also be able to go overdrawn again if you cannot manage for a while and not have to reapply. Although this can be too easy for some people and they get overdrawn due to overspending, it can certainly be less stressful.

Reputation of lenders

Some people worry about what the lenders reputation is like. Payday lenders tend to be smaller, newer companies whereas overdrafts come from high street banks and building societies that are well-known. You may feel that you want to borrow from a name that you trust and this is understandable as you may worry that if you need any help then you may be more likely to get it from a well-known company. This may not be the case though and it is worth doing some investigation yourself on impartial websites that you trust to find out a bit more about different lenders. Perhaps a money forum or message board or a money help website could be a good place to start.

Should I Worry that my Payday Lender Might go out of Business?

Whenever we borrow money we might have concerns about our lender. We may worry that they will not treat us as well as we might expect or that we might not get exactly what we were hoping for from the product that we are buying from them. However, we may also worry about whether they go out of business and what might happen as a result of that. This might be a particular concern with payday lenders as there have been some lenders that have gone out of business recently.

Am I right to be worried?

There is always a risk that a company could go out of business, but a change in regulations was something which many UK payday lenders felt the effects of. If it likely that a change of regulations might take place then there is the possibility of this happening again. A change in regulations will usually follow an inquiry and so it is likely that you will know whether this is something that is likely to happen.

If a lender does go out a business then with a payday loan this may not have a big impact. Your loan is likely to only last a few weeks anyway and so by the time there are any repercussions from the company going out of business, you will have paid it off anyway. Even if they go out of business their debts will still be collected and so you will not be able to get out of repaying the loan.

What can I do?

If you are still worried and want to protect yourself against this happening then you can try a few things. It might be wise to look in the news and see if there are any articles about any particular payday loan company struggling financially. You could take a look at the company’s books, which you can do through Companies House, to see what their previous years profits looked like as this could indicate what the current years will be like. You could also consider whether this type of loan is still popular and if demand is likely to fall enough to put lenders into difficulty.


If you are really worried about it and feel that perhaps you should not take out a loan like this as a result of your concerns, then there are some alternatives that you could consider. Firstly, as with any lending, it is best to consider not borrowing any money at all. Make sure that you really do need a loan. Consider whether you really need the item that you are buying with the money, for example and also think about whether you can get the money elsewhere. If you have any savings then it is wise to use those instead. You may also be able to ask for an advance of your salary which could be enough to help you out. There might be ways you can raise some money, perhaps by selling some things that you do not need or doing some work where you get paid right away.

If you need an alternative loan then there could be some options for you as well. You might be able to use an overdraft. If you have an arranged overdraft then this is the best way to borrow money using an overdraft. If you have no arranged overdraft then you may be able to still draw money using an unauthorised overdraft. You will need to be very careful though as these can be one of the most expensive ways to borrow money. You could be charged for each day that you are overdrawn as well a spaying interest on the money. This can add up really quickly and could mean that you end up with a great deal of fees to pay.

If you have a credit card, then this can be better option. You will still be able to get the money as quickly as with a payday loan or perhaps even more quickly, assuming that you already have a card and do not need to apply for one. They are still expensive but if you pay them back fairly quickly then they will usually work out cheaper than an overdraft. If you do not have a card, then it may take time to apply for one and you could find that if you have a poor credit record, you will not be able to get one.

If you do have a poor credit record then you will be very limited in the options that you have. You may not be able to have access to many loans but you might be able to find some different loans that need no credit check such as guarantor loans. These will take time to investigate and organise though and you may find that they are not a suitable loan type to address your needs anyway.