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When it comes to borrowing, knowing which type of credit to use can be difficult, especially if you have a bad credit history or a low credit score and your borrowing options are limited. Every day millions of people worldwide use credit to manage their daily finances, unexpected payments and lifetime events. Payday loans and credit lines offer two different ways to borrow. Instant payday loans are a common choice when it comes to needing cash quickly to cover emergency expenses. But short term loans are not the only option on the market: credit lines have become increasingly popular because they combine the better aspects of a payday loan and a credit card. While still having instant access to cash delivered straight into your bank account, a credit line is a revolving credit facility, so you have continuous access to credit and you only need to make minimum payments if you cannot afford to repay the full balance in one month.
There are not a huge number of payday loan alternatives for people with a bad credit file, and even those with a good credit history might find the current credit options unsuitable for their needs. If you use payday loans a few times throughout the year, or you are just looking for a new type of credit to better satisfy your financial circumstances, why not compare payday loans and credit lines?
A payday loan is a small amount of cash you borrow for a short period of time and typically repay on your next payday. Instant payday loans have been around since the late eighties, but they have changed quite considerably since then. The common features of modern payday loans include:
Payday loans are categorised as high cost short term credit because of the high interest rates charged on the loans, however their short term nature usually means they are not as costly as most people imagine. Payday loans are capped at 80p per day per £100 borrowed so if you only need to borrow a small amount of cash for a short period of time, they are a quick and easy way to do so. Payday loans should only be used occasionally and when the need to borrow is urgent, not if you can wait until you are next paid. For people with a thin credit history or a low credit score, payday loans may be the only option available if they need money quickly to meet urgent expenses.
Instalment loans evolved from payday loans, the only difference being you repay in multiple instalments over several months, instead of in one lump sum on your next payday. This can help reduce the immediate financial impact of repayment and can help you manage your money more effectively.
A credit line exists to help people manage their cashflow when they require more frequent assistance than short term loans can offer. With a credit line, your available credit is accessed through an online account, so you have to manually withdraw the funds into your own bank account. This means you cannot accidentally spend the credit and the process of withdrawing the cash gives you a little extra time to consider the reasons for your borrowing and assess your ability to repay the balance.
A credit line is similar to a payday loan. Credit lines tend to be more accessible to people with a poor credit history. A credit line means having a credit limit, which is the maximum amount you can borrow at any one time, and making minimum payments if you cannot afford to repay the balance in full each month. You are only charged interest on the amount you have actually borrowed, and as long as you stay within the terms of your agreement, you can borrow and repay as many times as necessary to assist your monthly cashflow. Credit lines are online credit services with online applications, meaning you can apply quickly, and if your application is approved, you can access the funds on the same day, so they still have the same speedy nature that payday loans possess.
If you like using payday loans because of the short term nature of the agreement, then a credit line might be a suitable alternative for you. Although a credit line is an ongoing form of credit, you can use the facility as a short term line of credit as you will only be charged for the actual amount borrowed – not your full credit limit. So, if you only need £100 for a few weeks, then you will only be charged interest on the £100 for the time that you borrow the money. As credit lines have a much lower rate of interest than payday loans, it usually works out to be a cheaper way of borrowing small amounts of cash over short periods of time.
If you do not use your credit line, you will not be charged anything at all. Sometimes, it can be a financial safety net to know you have access to quick credit when you need it, without having to go through the process of submitting a new application each time.
Borrowing via a payday loan or a credit line means the funds are transferred directly into your bank account – there are no additional payment cards to manage, and the repayments are usually collected by continuous payment authority (CPA). This means that although the repayments remain your responsibility, as long as your card details are up to date and there is sufficient money in your account, your repayments should be collected automatically. This is the same for both credit lines and payday loans, however credit lines have the added advantage of only needing a minimum payment each month. So, if something were to throw your budget off, you do not have to stress about repaying your balance in full.
The main difference between credit lines and payday loans, apart from the revolving nature of a credit line, is the interest rate. Payday loans are high cost credit which means the APR is over 100%. Although APR can be misleading if the borrowing duration is only a matter of weeks or months, it is almost always better to choose the borrowing option with the smallest interest rate. At Polar Credit, we also periodically reduce the rate of interest on your credit line to actively decrease the cost of your borrowing.
Credit lines and payday loans are fundamentally different, though they share some of the same features. It therefore depends on your particular circumstances and why you need to borrow to determine whether a credit line or a payday loan would be better for you.
It can be easy to assume a lower interest rate credit product is always better, but if you know you are often tempted to spend outside your means or you do so accidentally, then having access to revolving credit can encourage poor spending habits making money management harder. Compared to a personal line of credit, payday loans are an expensive way to borrow. So, if you find you need financial help a few times throughout the year, it would probably be cheaper to use a credit line.
In addition, you might want to consider whether you need to borrow for a short period or for more long term use. If you rarely need credit, then short term loans might be more sensible as they have static repayment amounts and it is very clear how long they take to repay and how much they will cost. With credit lines, you only need to make a minimum payment which can help if you have a flexible income, but it will take you longer to repay if you only make the minimum payment. You also only need to make one application, and then you can borrow as much and as many times as you need to (within your credit limit), whereas payday loans require a new application each time you want to borrow.
There are a lot of factors to consider, and without knowing your personal circumstances, it would be near impossible for a third party to advise the right loan or credit service. It is important whenever you are looking to borrow when you need cash quickly, that you do not jump to credit as a first option. It is always better to accommodate unexpected expenses from money you have earned or saved rather than money you have borrowed, which is why it is important to budget sustainably and build up a rainy day fund – even if it takes a few months or years to achieve. Credit can help you manage your money as long as you are not dependent on it, and where you have healthy financial habits in place to assist you.
Payday loans certainly have their usefulness, and for a long time, they have been the only way for people with a limited credit history to borrow money. However, credit lines have changed this. As a reasonable alternative to payday loans, a credit line is flexible and just as quick as a short term loan. Ultimately, it is up to you to decide which type of credit better suits your circumstances, but there is no harm in researching the different options available as you might find a new product which works for you – and you might also save a little money on repayments, too.
Visit our Info Hub for more information about credit lines.