Borrowing has changed drastically since the first overdraft in the 1700s. As people’s circumstances change and technology improves, banks and financial institutions can offer a more diverse range of products to help their customers meet everyday expenses and one-off payments throughout the year. While the use of credit is not new, there are a few products which have only recently entered the financial market. One particular product to help with cashflow shortfalls throughout the month is the credit line. As credit lines often cater to people with poor credit histories or low credit scores, they can be considered an alternative to payday loans, even though the two services are quite different.

Payday loans

A payday loan is a short term loan. You can borrow small amounts of cash which you repay with interest on your next payday. As well as single-repayment payday loans, you can also find instalment loans which allow you to split the repayments over several months. An instalment loan is more expensive in the long run, but the smaller monthly payments are often preferable as customers can more easily manage their usual expenses alongside the repayments.

Credit lines

Credit lines are a revolving credit facility. More similar to a credit card than a payday loan, a credit line allows you to borrow up to your credit limit whenever you need to, without submitting a new application each time. You are only required to repay the minimum payment each month, although this will take you longer to repay the balance, and often you are charged transaction fees as well as interest.

Pros and Cons of Payday loans and Credit lines

The reason there are so many types of credit available is that they each meet a specific consumer demand or target market. For example, mortgages allow people to buy a house, overdrafts mean you can borrow small amounts of money without applying for credit and credit cards have additional consumer protections compared to other forms of payment.

Payday loans and credit lines cover a section of the market which mainstream credit often ignores: people with bad credit. Having a poor credit history doesn’t mean you aren’t responsible or able to afford credit repayments, but mainstream creditors may see you as too much of a risk to lend to. A bad credit loan or a credit line means you have access to credit that allows you to meet your emergency payments or day to day cashflow.

While both offer a service to those who would be financially excluded from mainstream credit, the function of the credit they provide differs. Payday loans should be used for unexpected or emergency expenses that can’t wait until your next payday. A payday loan might be a suitable option if not accessing the credit would put you in a worse financial position. A credit line on the other hand has a slightly wider range of potential uses, although all borrowing should be a considered decision and ideally only when necessary.

Main factors when applying for a payday loan:

  • Simple and quick application process
  • Same day loan transfers
  • Clear repayment costs so you can budget accurately
  • High acceptance for people with bad credit
  • High interest rates so should only be used in emergencies
  • Approval is not guaranteed and multiple rejected applications can be negative on your credit file

Main factors when applying for a credit line:

  • Simple and quick application process
  • Same day withdrawal times
  • Minimum payments if the full balance is unaffordable
  • Lower interest rate than payday loans
  • Minimum payments change depending on your borrowing activity so you won’t know how much is due until you receive your statement which can make it harder to budget
  • Continuous access to credit so you don’t need to submit a new application each time you want to borrow, however this can also lead to temptation to spend the money borrowed unnecessarily

Should I choose a payday loan over a credit line?

The type of credit you apply for largely depends on your circumstances and why you need to borrow. The uses of payday loans are not as varied as the uses for a credit line, but if you know you’re prone to impulse buying or credit dependency, then having constant access to credit via a credit line (or any revolving credit facility) might be an irresponsible decision, even if you can afford the repayments. A payday loan on the other hand will subject you to an application each time you need to borrow, which not only gives you a little extra time to consider whether you really need to borrow, but also limits the accessibility of borrowing as the funds aren’t readily available.

Overall, the type of credit you choose is up to you. You know what your financial circumstances and commitments are and how much disposable income you have leftover each month to use towards credit repayments. The main thing to remember before applying for either a payday loan or a credit line is to ensure that you can afford the repayments and the borrowing won’t worsen your financial situation. It can be easy to overlook potential repayment difficulty in urgent circumstances, so always take a few minutes before submitting your application to accurately review your finances and even talk to a trusted partner or family member first.