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.