If you are looking to obtain finance for whatever purpose, it can be hard to know which road to go down. Many people prefer the idea of an overdraft as it seems less of a commitment, but is this the case?  Well, as of recent, the Financial Conduct Authority (FCA) has vowed to crack down on the high-cost charges placed on overdrafts. These fees have been revealed to be seven times higher than the interest rates you will find with a payday loan.

In this guide, we will run through the differences between an overdraft and taking out a payday loan so you can determine which is the best option for you.

An Overdraft


An overdraft allows you to borrow money directly from your current account, rather than from an external source like a lender or the bank. Not all basic bank accounts offer the service of an overdraft, but you can ask your bank if you are eligible.

Overdrafts tend to be designed for people who have poor credit ratings and they are hailed as the perfect choice for university students. University students often get a free overdraft, meaning they do not get charged for going into or staying in their overdraft. Therefore, it is advisable to make use of an overdraft when you are a student and then begin to pay it back, should you go into it, once you become employed after you graduate.

Nevertheless, please be aware that an overdraft can come with its temptations. It is not uncommon for users to fall into the trap of seeing the overdraft limit as their own money since they are technically borrowing it from themselves. It is usually displayed on your online bank account or when you check your balance on an ATM, that you have X amount available which will include you overdraft allowance. So, it may say you have £4,000 available, but you only £3,000 actually present in your account. The extra £1,000 is provided by the security of the overdraft.

If you have gone into your overdraft, your balance will show up as a minus (e.g -£250). Whatever the number is after the minus, is what you owe back to yourself. If your overdraft limit is for example, £1,000 you take away the minus number to get what you still have available to borrow. Look at it this way, if you get your pay cheque of £1,000 but had -£250, your new balance would be £750 as you have to use that money to pay yourself back in part.

A Payday Loan

A payday loan is a type of short term credit which you apply for and pay interest on. The nature of a payday loan requires you to borrow the money to then pay it back come your next payday, so it is a popular choice for many who need money in-between pay cheques.

The money is paid directly into your bank account once the lender has approved your application. This is usually within 24 hours of approval. Once the period of time is up, you pay the money back in full along with the interest which has been agreed upon.

With payday loans, you need to be sure that you can pay your loan back in full, with any interest and additional charges, before you apply. Failing to do so can put you in a worse financial position than you were already in. If you are sure that you will be in a financial position to do so, a payday loan is great for those who need money quickly.

Some people find it hard to get a payday loan approved because of their credit score. As you may be aware, the better your credit score, the more likely you are to get a good deal on a loan. There are many things you can do to improve your credit score, which you can check out here. However, if you do not have time to improve your credit score before taking out a loan, consider Payday Bad Credit. We offer payday loans to people, despite their credit rating since we understand that keeping a good credit score is not easy and various circumstances can cause a less than perfect credit history. With us, you can borrow up to £1,100 which you can then repay over several weeks.


Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.