Payday loans continue to make headlines across Europe, but this time for different reasons to those you might expect. A number of commentators and consumer groups, such as UK’s Which? are highlighting the importance of financial planning against drawing on unplanned overdraft facilities. The latter are far more expensive than facilities offered by specialist short term credit providers, also known as “payday loans”.
Today’s consumers regularly turn to unauthorised overdrafts to meet short-term financial needs over taking out payday loans, mainly because borrowers are often unaware of the significant charges associated with unauthorised overdrafts. Overdraft facilities offered by reputable high street banks carry less stigma than applying for pay day loan facilities from less well-established specialist short term credit providers. However, they prove to be more expensive and their products are less competitive than those offered by specialist short term credit providers.
Borrowers who exceed their agreed overdraft can be subject to costs as much as £90 for one month from some UK high street lenders, four times more than the cost of a payday loan.
On 1st January 2015, the Financial Conduct Authority (FCA) in the UK introduced a cap on the cost of borrowing a payday loan at a maximum of £22.40 per £100 borrowed for a period of 28 days. No such cap exists for charges related to unauthorised overdrafts.
While charging structures differ from bank to bank, Which? found that the cost of using an unplanned overdraft could be up to 12.5 times higher when including interest payments or possible unpaid item fees, or when the money was borrowed over two monthly charging periods. These excessive levels of charging are caused by the maximum charge being related to the charging period, rather than for how long the money was borrowed for, as is the case with a payday loan service.
A spokesperson for Which? has called for unauthorised overdraft fees to be set at the same level as authorised overdraft charges. The call is for the Financial Conduct Authority to review overdraft charges in the context of other forms of credit. Similar trends can be seen across Europe and the USA, where short term credit providers, unfairly labelled as less legitimate routes of borrowing, are facing increased levels of regulation over their more traditional counterparts. This research highlights that when it comes to personal financial planning, it is important to know the cost of borrowing money from different sources.
Know the cost of borrowing
- Make sure you read the small print on any loan or credit you take out
- Set up alerts on your phone or via email to keep up to date on your balance
- Please see “Evaluate your Lender” section of the website for tips on how to assess your loan provider