The cheapest methods of short-term borrowing

 

This case study looks at “Peter” an individual, who like many in the UK is short of cash at the end of the month and wants to borrow £100 at the cheapest possible rate. Peter wants to look into the different short term borrowing options that are available to him. There are four realistic options, payday loans, an authorised bank overdraft, an unauthorised bank overdraft and a credit card. To determine how much it will cost Peter to borrow £100 from each of these lenders, he needs to calculate the following:

• The interest rate against the loan of £100
• The length of time he will repay the loan – one week for this example
• Any additional hidden charges
• The total cost of borrowing and repaying the loan of £100

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Payday Loans

• The average APR of a payday loan is 1737%
• Payday loan terms mean that Peter must repay the loan within 30 days
• This means that to borrow £100 would cost Peter £25 to repay at this level of APR
• The total cost of the loan is £125
• Some payday lenders charge for additional services, however there is enough competition in this industry that Peter can choose a lender with no additional charges.

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Bank Overdraft –Unauthorised Bank overdrafts can either be authorised or unauthorised. Authorised overdrafts are pre agreed, for example a student overdraft of £1500 and unauthorised overdrafts are when you have not pre-arranged to borrow that amount of money from your bank i.e. if you go over the agreed limit.

• Unauthorised bank overdrafts must be repaid asap i.e. one week
• The average amount of money charged per week for an unauthorised overdraft is between £22 and £186 per month, an average of £104
• The total cost of the loan would be £204 

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  Bank Overdraft – Authorised

• The cost of authorised bank overdrafts is anything between 9.9% and 19.9%APR. The average of this is 14.9%
• Authorised bank overdrafts can be repaid whenever Peter decides to make the repayment as he has agreed this with his bank
• The average amount of money charged per week for an a £100 overdraft is £14.90
• The total cost of the loan would be £114.90

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Credit Card

• The average APR of a credit card is 16.9%
• The amount of money charged for the £100 loan is £16.90
• The total cost of the loan would be £116.90

Looking at all of these calculations objectively, an authorised bank overdraft is the cheapest way to borrow money, followed by a credit card (providing the balance is repaid within one month), which makes payday loans the third most expensive way to borrow £100, and finally unauthorised cash till payday loans are the most expensive method. If the balance of the credit card was not repaid within one month, the cash till payday loan would be the second cheapest method of borrowing £100. Infographic from:  

http://www.fastpaydayloansreview.com