Payday Loans Vs. Authorized Bank Overdrafts – What’s Better?

It can be surprising to learn that 40% of Americans do not have cash reserves big enough to offset an emergency worth $400, according to an article on Fortune. Sadly, when emergencies strike, you will need to look for a way to offset any resulting financial obligations. In most cases, a quick and efficient solution will suffice to ensure that you are on the right track.

This makes both payday loans and authorized bank overdrafts amazing solutions since they can help you in times of need. However, they both come with their own pros and cons, and knowing which of the two is best for your situation will help you make the right choice. Since they are both loans, being careful in your choice will help you evade any future debt traps.

Here’s a guide to helping you compare both options.

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What Are Payday Loans?

Online payday loans are simple short-term loans that run for at least one month. They are typically offered to borrowers to offset their expenses before they receive their paychecks. Unlike other types of loans, the approved process is fast, and lenders can accept borrowers who have low credit scores.

This makes them best for people in tight financial spots, but need financial breakthroughs quite fast. On the flip side, they tend to come tied to high-interest rates that average at 300% APR. Furthermore, some regulatory bodies have been urging payday loan lenders to assess their customers a little bit more to ensure that they can, in fact, offset the loans that they borrow.

What Are Authorized Overdrafts?

An arranged/authorized bank overdraft is a simple loan in which the bank allows you to withdraw more cash than is in your bank account. While banks will need you to pay charges and interest in some accounts, some might offer free overdraft facilities to some of their users – often known as buffer zones. The trick is to avoid drawing cash beyond the limits of the overdraft to steer away from common penalties, especially if you rely on the overdraft facility pretty often.

If overdrafts weren’t allowed, there would be high cases of cheques that bounce, leading to fraud situations. In exchange for this convenience, most banks will charge their customers for every overdraft they make. Normally, the charges per overdraft range from $20-45 per transaction.

Applying For Bank Overdrafts vs. Payday Loans

You can apply for authorized bank overdrafts either at home or online. Just like most loans, banks will typically have to look into your ability to pay the loan, and your credit score will play a major role in determining whether you qualify for the loan or not. You will also have to set your overdraft limit and determine the period by which you are willing to repay it. The better your record with the bank is, the higher your chances of getting approved for overdrafts.

Payday loans, as mentioned earlier, might not call for a high credit score, and you will only have to apply online or through the smartphone apps of the lenders. Once the application is approved, the cash will be deposited in your account within minutes.

The Actual Cost Of Both Services

While the cost of a single overdraft might seem small, multiple overdrafts will easily snowball into high-interest rates. In a case where you are charged $34 per overdraft, ten overdrafts will amount to $340.

On the other hand, payday loans come with an already defined interest rate and APR. Failure to pay the loan on time can easily result in a debt cycle where you shift the loan payment date to a later time, and interest rates increase. Simply put, the option you choose will best be dictated by your situation.


Both payday loans and bank overdrafts are meant to help you out of tricky financial situations, but they both come at a cost. While payday loans will be great for people with subpar credit scores, bank overdrafts are great for people with good standings with their banks. Assess your situation wisely to make a desirable choice.

If you are interested in even more business-related articles and information from us here at Bit Rebels then we have a lot to choose from.

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