Are short term loans truly more costly than using an overdraft?

With one of the biggest criticisms of short term loans being their exorbitant interest rates, many providers of quick loans have published a comparison chart that highlights the relative cost of such a loan with a bank overdraft.

Providers of small loans can actually be quite favourably compared with bank overdrafts, according to the research.  With a sum of £100 borrowed for one month, short term loans can sometimes be cheaper than using an unauthorised overdraft, though authorised overdrafts are oftentimes a better choice due to the high APRs advertised on these quick loans.

Martyn Saville, a credit expert from Which?, remarked on the research findings, stating that it is true for the most part that companies offering short term loans claim that they are less expensive than using an unauthorised overdraft.  However, Mr Saville said that both unauthorised overdrafts and short term loans are not as good a value for money in comparison to an authorised overdraft, and if a consumer has such an overdraft available to them, they should avoid using the more costly options.

The credit expert also said that consumers need to exercise some wariness when reviewing instant cash loan providers and their APR claims. Some websites will compare a five year and three year loan, both of which have a 19.9 per cent advertised APR, with their own 30 day short term loans with a 1,737 per cent APR.

The comparison concentrates on the actual amount of interest paid for each option, with the conclusion that the repaid interest on a longer term loan is considerably higher than on one of their short term loans.  However, some credit experts feel that such an argument can be misleading, as an interest charge of £125 on a 30 day long £500 loan is clearly not as good a value as a £153 charge over a span of three years, leading experts to say that consumers need to not just think about the amount repayable on the loan but also about the length of the loan as well.

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