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Over the past few years, it has been debated whether it is better to have overdraft protection on a personal debit or credit card or if it is better to take out a payday loan to cover end of the month expenses if the unexpected happens and the person runs out of money before that next paycheck.  Of course, the best option would be not to have to deal with either of these two options, but if the choice must be made, it would be helpful to know how these two options compare to each other.

Loan Amount

Payday loan amounts are based on the amount that the person receives in their weekly or bi-weekly paycheck.  The loan amounts begin at $100 and are typically capped at $500 or $800, depending on the policy of a particular payday lender.  The amount that is covered under overdraft protection is typically much less and can be denied by the banking institution at any time, resulting in a declined transaction in the case of a debit or credit card or a bounced check.

Repayment Period

Payday loans are considered to be an advance on your next paycheck and must typically be paid back at the end of a two week period.  This can cause financial hardship for the person taking out the short term loan if they do not make enough money to cover the repayment of the loan and cover the rest of the bills that come due during that time period.  Overdraft protection charges are immediately charged to the person’s bank or credit card account, giving their account a negative balance, and the overdraft charges must be paid quickly to prevent negative balance or over-limit fees from being charged to the account as well.

Occurrence Limits

With a payday loan, the person will only be able to have a single payday loan on file from a single payday loan lender location during each two week period, unless the original loan is paid off to allow the request of another payday loan.  Some people skirt this system by having payday loan accounts at multiple lenders so that they can take out multiple payday loans at the same time.  Overdraft protection can be used as many times as the person sees fit within a monthly period, although some banking institutions and credit card companies will deny the transactions if they feel that the system is being abused or that there is a chance that they will not be repaid.

Fee Amounts

Payday loan fees increase progressively depending on the amount of the loan but typically work out to $15 for every $100 borrowed.  Overdraft protection fees are a set amount regardless of the amount of the transaction and are typically between $29 and $39 per occurrence.  This means that going $5 over the limit in a single transaction will result in a $39 charge just the same as going $300 over the limit with a single transaction.