If you have an overdraft then it could worry you that it is so expensive. An overdraft will have high charges, especially if it is not an overdraft that you have arranged with your bank. This means that it could be a big concern and you may want to do everything that you can to repay it and you may see a payday loan as an answer to this. It is worth understanding a bit more about these two types of loans before making up your mind as to whether using one to repay the other is a good idea.
An overdraft is often arranged when you open a checking account with a bank. They will agree to lend you extra money should you need it so that you can write checks, send direct debits and get out cash even if you have no money in the account. They will lend you up to a certain amount of money. These can be useful if you run out of money and need to buy something in an emergency but they will cost you. An overdraft can be dearer than other forms of lending. You will find that if you borrow more than your overdraft limit (sometimes called an unauthorised overdraft) the charges will be even higher. You may be charged for every day that you are overdrawn. It is really important to make sure that you are aware of how much the overdraft is going to cost you and how that compares to other borrowing options.
The good thing about an overdraft is that it will be repaid automatically when money goes into the account. This means that you do not have a fixed repayment schedule and do not have to find the money to repay at a certain time. However, it does mean that it can be outstanding for a long time and therefore keep attracting interest and possibly fees.
A payday loan works very differently. You will borrow a lump sum of money; usually a few hundred dollars and you will have to repay it when you get paid. A direct debit will be set up so that the money you borrowed and the fees and interest will all be automatically repaid on your payday. This means that the loan does not last very long which can be good for anyone who does not like being in debt for long. However, you will need to find the money to repay the loan all at once and then manage for the rest of the month with less money, which can be a struggle for some people.
The loan can be arranged very quickly, sometimes within a few hours which means that it is often used for emergency payments. It could also work for repaying an overdraft as you can get the money quickly so you will be able to stop paying the overdraft fees quickly. There is also no credit check on the loan which means that the fact that you have an outstanding overdraft will have no impact over whether you are likely to be accepted for the loan or not.
Which to use?
If you have an overdraft, it is possible that you could use a payday loan to repay it. A payday loan may be cheaper but it will depend on the costs of each and so you will need to check this. If the payday loan is dearer then you will gain nothing from using one.
It is only wise to choose to do this if you can save money and you can be confident that you will be able to afford to repay the payday loan. If you do not repay the payday loan then there will be extra charges and fees for it and this could make it more expensive than the overdraft. It may therefore be better to just repay the overdraft when you get paid. This would also be less complicated.
There is a risk in having a payday loan in that you may not be able to repay it. With the overdraft you already have that risk and so it may not be wise to take out another loan and add to that risk. You may also be tempted to take out the payday loan, repay the overdraft and then borrow more money using the overdraft. This will mean that when you do get paid, you may not have enough money to repay it as the overdraft will get repaid first.
It is really important to make sure that you are really careful if you are using one loan to repay another. You could end up in all sorts of financial trouble. Calculate carefully whether you will save money doing this and make sure that you will be able to afford the repayments so that you do not have to pay additional charges.