Overdrafts, Payday Loans and Buy-Now-Pay-Later: What to Know
By C.G. Handley
When money runs out before payday, borrowing can feel like the only choice. Some forms of short-term credit are far more expensive and risky than others, so it helps to understand them before you need them.
Overdrafts
An overdraft lets you spend more than you have in your current account. An arranged overdraft is agreed with your bank in advance, up to a limit. An unarranged overdraft happens when you go past that limit or have no overdraft at all. Since 2020, UK banks have had to price overdrafts using a single annual interest rate rather than a complicated mix of fees, which makes them easier to compare. Many banks offer an interest-free buffer or a small interest-free amount. Check your own bank’s rate, as it varies.
Overdrafts are generally a better option than payday loans for a short gap, but they can become a habit. If you are in your overdraft for most of the month, it is a sign that your budget needs attention rather than another loan.
Payday loans
These are high-cost short-term loans, usually repaid on your next payday. The Financial Conduct Authority limits the cost: interest and fees are capped at 0.8% per day, with a cap on default fees, and you can never be asked to repay more than double the amount borrowed. Even with those rules, the cost is high, and rolling a loan over can make the next payday harder. They are best treated as a last resort.
Buy now, pay later
Buy-now-pay-later (BNPL) lets you split a purchase into instalments, often interest-free if you pay on time. It is convenient, but it is easy to lose track when you have several plans at once, and missed payments can bring fees and affect your credit file. BNPL has been moving under Financial Conduct Authority regulation, so check the current protections with the provider and on the FCA website. Treat BNPL like any other debt: only use it for things you would buy anyway and can afford.
Cheaper alternatives
- Talk to your bank. Ask about an arranged overdraft, a fee waiver or a short-term plan before you run out.
- Ask for time. Landlords, utility firms and lenders often agree a short delay or payment plan if you contact them before a missed payment.
- Credit unions. Many offer small, lower-cost loans, and you may be able to join through your area or workplace.
- Employer help. Some employers offer pay advances or hardship support, so it costs nothing to ask.
- Support schemes. Check whether you can claim benefits, council tax support or local hardship funds.
Warning signs
Borrowing to pay for essentials, taking out one loan to repay another, or hiding statements from people close to you are signs that you should seek advice. StepChange, Citizens Advice and National Debt Line all provide free, confidential help. Avoid anyone who charges upfront fees for debt help.
Plan to need it less
The most effective step is to reduce the gap itself. Our guides on budgeting between paydays and building an emergency fund explain how.
This article is for general information only and is not financial or legal advice. For personal guidance, speak to a qualified adviser or an organisation such as MoneyHelper, Citizens Advice or ACAS.