Have you ever had an unexpected expense crop up far away from payday? Many of us have experienced this stress, which is why we sometimes need a cash boost to tide us over. But, with so many different products available on the market, it’s often hard to decipher which one is right for us.
Before committing to a certain product, you want to know all you can and ensure it offers what you need. Drafty understands the confusion around the meaning of a line of credit and an online payday loan, so we’re here to explain the pros and cons in a simple, factual manner.
This blog will detail the similarities, differences, requirements and implications of a line of credit and a payday loan.
What is a line of credit?
But what does getting a line of credit mean? We think of a credit line as an alternative to an overdraft, credit cards for bad credit or loans. It’s like a pot of cash you can reuse as much as you need – when you need it. And, if you’re not using it, you won’t have to pay a thing!
Drafty offers a line of credit. If approved, you can borrow up to £3,000 and then repay it monthly. As long as you repay the minimum monthly amount, you can choose how long you want to borrow for. And if you don’t draw any of the money, you don’t pay anything. Representative 96.2% APR (variable).
What’s more, you can repay a little extra whenever you like and you’ll save on interest. You can draw funds from your credit limit again and again without needing to reapply too.
Credit lines like Drafty offer a fresh perspective, helping you boost your finances while staying in control.
What is a payday loan?
Simply put, small payday loans are short term loans designed to help people bridge the gap until they next get paid. The agreed amount you borrow gets paid into your bank account and you repay it in full, plus interest, at the end of the month.
Direct payday loans are typically only available for small periods, perhaps only up to a few months. However, the costs are high during that period, potentially leaving you with some large repayments at the end of the month. People often turn to instant payday loans as they offer money quickly to those in need. However, this comes at a cost.
Interest is often fixed for online payday loans because they’re designed to be repaid in full at the end of the month, so there’s no need for variables.
Similarities of a line of credit and a payday loan
Both are short-term lending options
A line of credit agreement and a payday loan are both designed to be used in the short term. People often turn to these lending options as they offer money quickly. Perhaps you’re dealing with a broken boiler or need a new fridge – whatever it is, both options will cover these short-term costs. However, a line of credit could be used for a longer period than a loan, but it’s not a long-term financial solution.
Interest rates are variable depending on your choice. More often than not, though, a shorter borrowing period means a higher interest rate. So, it’s worth exploring your options before you jump in.
Both funds are transferred to your bank
If you need help with making a payment, a line of credit and a payday loan from a direct lender will help you cover the costs. Both transfer money to your bank account, ensuring you can foot the bill for any unexpected costs.
Both can help your credit score – if you meet your repayments
If you use your line of credit or payday loan responsibly and you make your repayments on time, you could boost your credit score. Future lenders might see you as financially responsible if you pay the money back on time and don’t take out credit too frequently.
Differences between a line of credit and a payday loan
A line of credit allows you to borrow more
As the name suggests, an instant payday loan is designed to cover smaller costs until you next get paid. And while a line of credit is still a viable short-term option, you could get access to more money and enjoy greater flexibility with your repayments.
Drafty’s line of credit allows you to borrow up to £3,000 within an agreed amount of time. What’s more, you can reuse your line of credit without having to go through another application, provided you’ve completed your repayments.
A line of credit has a spending cap
A spending cap is good to help people lend responsibly. For example, a Drafty, a payday loan alternative allows you to borrow up to £3,000 from your approved credit line, but you can reuse it if you meet your repayments.
Interest rates
It’s well recognised that payday loan interest rates can be sky high. This is often due to the borrowing taking place over a shorter period and being of more risk in the eyes of a lender. However, where a line of credit like Drafty is concerned, interest rates are much lower. Take a look at our comparison page to see for yourself.
Is a Drafty line of credit right for you?
Want to find out how a Drafty line of credit can help boost your cash flow? Check out our ‘About Drafty’ page.
Disclaimer: We are not providing financial advice, these are just tips for informational purposes. Also, we are not affiliated to any of the external parties, these links are provided for reference only.
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