Choosing between payday loans and credit lines

How we manage our money is entirely personal and largely down to our individual circumstances, which is why borrowing money is second nature for some people, and for others it can be an entirely foreign concept. If you’re fortunate enough to have healthy savings and a large disposable income each month, then you’re unlikely to have the same trials and tribulations as those with more restrictive finances. Borrowing is probably something you’ve never had to fully consider, except for perhaps a mortgage and the occasional arranged overdraft usage. If you’re on the other end of the spectrum, your borrowing options and loan repayments probably consume your every second-thought, and it can feel overwhelming at times to make financial decisions.

One of the things you can do, regardless of your current or previous financial circumstances, is make sure you’re using a suitable and sustainable borrowing service to ensure you don’t increase the risk of having money problems.

Different types of borrowing

There are so many alternative types of credit and ways to access cash quickly these days that it can be difficult finding the right solution to your financial woes. There is a wealth of information online and you should read up on the different ways to borrow before applying for credit. We will discuss two options here, and we will keep it brief so you can understand the main points with ease.

Payday loans

Payday loans are a form of high cost short term credit. You can usually borrow this kind of loan from anywhere between 30 days and 12 months and they can make great short-term solutions for cashflow issues like unexpectedly high bills or emergency, one-off payments. The applications are available online with most lenders, so you can apply 24/7, and if you are approved, the money is usually transferred to your bank account on the same day. You have monthly repayments which are confirmed prior to you signing the loan agreement. The interest rate is high compared to other forms of borrowing; however, payday loans tend to have higher acceptance rates than mainstream credit. This means that you may be able to get approved for a payday loan even if you’ve been turned down by other types of lenders because you have a poor or limited credit history.

Credit lines

Credit lines are not short term or high cost but there are similarities to payday loans. You can apply online, and like same day loans, credit lines generally also allow access to cash on the same day you are approved. The main difference is that you have to withdraw the funds you need from your online credit line account. The money is then transferred to your bank account to spend as you need to accommodate your unexpected or planned expenses. Credit lines are a revolving service you can borrow from month to month as long as you stay within the terms of your agreement. Although credit lines are not classed as high cost credit, they still generally have higher acceptance rates than certain types of mainstream credit facilities. So, if a payday loan isn’t really right for your circumstances, but you have a bad credit file, credit lines could still be an option.

Different types of credit repayments

Another of the main differences between payday loans and credit lines is the way the funds are repaid. Payday loans are a fixed term loan agreement, so you only borrow the money for a specified length of time. Because the lender knows how long you are going to borrow for, they can also tell you exactly how much your repayments will be each month before you’ve signed the loan agreement. You can therefore make a slightly better judgement as to whether you can accommodate the repayments into your budget.

Credit lines, on the other hand, are an open-ended credit agreement, so there is no fixed borrowing term. There is also no fixed borrowing amount: although you have a credit limit, you are only charged for the actual amount that you borrow. This means that you could have a credit limit of £1000, but if you only withdraw £200, you will only be charged interest on that £200. Instead of large monthly repayments, you would be expected to pay at least a minimum payment each month, which can offer more flexibility if your finances continue to face common cashflow issues throughout the year. You can also repay the full balance each month – or any other amount in between – so you can make repayments to suit your finances. It will take longer to repay the balance by only making the minimum payments, but it can be a comfort to know that in trickier months, you have the option of just paying a token amount towards your credit line.

Making considered borrowing decisions

It’s important that any borrowing decision is well-considered because having access to even the 10 best payday loans won’t help you if you need longer-term financial assistance or more flexibility in the repayment structure, for example. Furthermore, no amount of borrowing is going to help at all if you’re already in a bit of a financial hole.

Always check your budget before applying to make sure you can accommodate the repayments and that committing to additional financial responsibilities is affordable. Depending on the reason you need to borrow, there may also be additional help available that means you don’t need to borrow from a third party. For example, if you receive a large bill from HMRC, you might be able to spread the balance over a few months to repay it in smaller instalments, rather than taking out a loan which will accrue interest.

Your finances need to work with you in order for your money management to be effective. One of the ways you can control your money is by making sensible borrowing decisions, whether that’s using payday loans or credit lines, or even not borrowing at all.