Payday Loans vs Credit Lines

With so many different types of credit available both online and in branch, it can be tricky to know which lending product best suits your financial circumstances and borrowing habits. Payday loans are a well-established type of loan and most people are quite familiar with the reasons you might use a payday loan. Credit lines, on the other hand, are relatively new and some people may not quite understand how they work or how they’re different from payday loans.

In this quick guide, we will discuss what a credit line is, how it differs from a payday loan and why it might be a useful credit product for you.

What is a credit line?

A credit line is a type of revolving credit which you can use from month to month. There’s no payment card for a credit line, and when you withdraw funds, the money goes straight into your bank account. You need to make at least a minimum payment each month, but you can withdraw as much of your credit limit as you need at any one time. Credit lines are online facilities and can be managed entirely online as well so you don’t need to visit any branches to complete the application or access the funds.

Uses of Payday Loans and Credit Lines

Generally, payday loans and credit lines should be used for the same sort of purposes. Payday loans were designed to be used to bridge the gap between paydays when an emergency or unexpected expense arises. While you might make every effort to budget carefully, if you are suddenly faced with a cost which needs urgent attention such as a car repair to pass an MOT, you might not have the funds until your next payday. This is where a loan like a payday loan comes in because you can borrow a small amount of money over a short period of time.

Credit lines go one step further to offer this kind of financial support whenever you need it. As a credit line is a running account, you can use it every month if you need to. However, just because you have access to credit, it doesn’t mean you should use it. Credit lines should still only really be used for emergency expenses and to help you manage your cashflow from month to month.

Neither a payday loan nor a credit line is a secondary source of income, so if you find yourself consistently relying on credit to meet your regular financial commitments, you might want to look at more long-term solutions to effectively manage your finances. This might include a debt management plan to manage your debt, or even just a budget re-adjustment.

Main Differences between a Payday Loan and a Credit Line

  • Payday loans generally have a loan duration of less than 12 months whereas credit lines are open-ended agreements
  • A credit line only requires a minimum payment each month, but a payday loan means you have to make your agreed monthly payments in full to prevent your loan from becoming overdue
  • Credit lines generally have a lower interest rate than payday loans

Main Similarities between a Payday Loan and a Credit Line

  • In both cases, the funds are transferred directly into your bank account (and usually within minutes)
  • They are designed to help you manage your cashflow between paydays
  • You can apply for and manage credit lines and payday loans online

Why is a credit line a useful credit product?

If you often use your overdraft or a credit card to make payments throughout the month, then you might benefit from using a credit line instead. It operates in a similar way to both, but the entirely online function of a credit line means you don’t need a payment card, like you do with a credit card. As the funds deposit directly into your bank account, you can make standing order payments, bank transfers and direct debits with minimal effort. Additionally, credit lines are generally cheaper than a payday loan when borrowing the same amount over the same length of time. So, if you find you use a payday loan a couple of times throughout the year, you might decide a credit line is more appropriate – especially if your income fluctuates and you need flexible repayments.

Ultimately, only you can decide which credit products suit you, and you’ll have your own preferences depending on your circumstances and the reasons you need to borrow. However, it doesn’t hurt to be aware of the different types of products out there – particularly when new products join the market.

Whenever thinking about taking out credit, you must always consider your circumstances at the time of repayment, not just at the time of application, as missing your repayments could cause you severe money problems. You may just need to budget a little more accurately for the rest of the month or, by putting some funds aside in a good month, you may be able to reduce the total amount you need to borrow (and therefore the interest that you pay!) in the future.

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