Borrowing a Payday Loan v/s Borrowing from a Line of Credit v/s Cash Advance on a Credit Card

Payday loans are much more expensive to borrow than borrowing from say a line of credit at your bank or cash advance on a credit card. Have you ever wondered what the difference between these 3 items is? Which one is the cheapest option, and which one is the most expensive? We will compare the total costs of borrowing from each of these 3 sources.

Say you borrow $500 from each of these sources of financing. Here's how the results compare:

  Payday Loan Credit Card Cash Advance Bank Overdraft Protection Borrowing from a line of credit
Interest - $3 $3.52 $2.6
Borrowing Fees $75 $3 - -
Total Cost of Borrowing $75 $6 $3.52 $2.6
Cost of Loan in % ** 390% 32% 19% 13%

** The Cost of Loan in % format is calculated by:

  • Dividing 52 weeks of the year by 2 = 26 weeks
  • 26 weeks x $75 = $1950
  • $1950 / $500 = 390%

Here's how you compare these sources of financing graphically:

As you can conjecture from the graph above, borrowing from a line of credit is the cheapest option ($2.60) with bank overdraft protection coming in 2nd at ($3.52). Cash advance from a credit card is 3rd with ($6.00) while payday loans are the most expensive to borrow, at a whopping $75!

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