Is a Payday Loan better than a Credit Card?

Many people need to borrow small amounts of money and may be looking to pick between different types of borrowing to find which suits them the best. As we are all different there is not a ‘one size fits all’ solution. This means that it is important to look at some of the main differences between the two types of borrowing so that you can pick the one that will suit you the best.

Credit Rating

It is firstly important to note that a payday loan requires no credit check. This means that if you have a poor credit rating then you will still have a good chance of being approved for this type of loan. With a credit card you will need a good credit rating to get one and the better your rating the better chance you have of being accepted. If you are not sure as to what your credit rating might be then you can look at your credit record for free and you will be able to find out what the chances are of you being accepted for a credit card or other type of loan. This can be quite a handy check to do and it will not show up on your credit rating or change your credit record if you do so.

Speed of organising

If you need the money really quickly then this could determine which you use. If you already have a credit card then it will be quicker for you to use it as you will not have to set up a new loan. However, if you do not then it could take quite a while to get one. You will have apply and wait to see if your application gets accepted. Then you will have to wait for the card to arrive and for the PIN to arrive before you can use it. This could take a good week and this might be too long to wait if you need the money really fast. With a payday loan, you can often organise them within a few hours. This means that they money will be in your bank account very quickly and in some cases it can even be done outside of normal working hours.


The way that you have to repay the different types of borrowing is very different and it is important to make sure that you are happy with this repayment system and that you will be able to afford it. A payday loan has to be repaid in a lump sum on the day that you are paid. In order to help you, a direct debit is set up to take the payment on the day that you are paid. This is handy for anyone that might otherwise forget to make the payment. Doing it on payday means that you should have the money available in your bank account to cover the cost of the repayment. It is a lump sum repayment, which means that it will all be paid off in one go and you will be free of the loan quickly. However, it does mean that you will have to be careful that you can manage once that money leaves you bank account as you will need to pay all of your other bills.

With a credit card the repayment is very different.  You are sent a bill between 4 and 6 weeks from when you get the card and you will have options with regards to payment. You will be able to pay off everything you owe and pay interest at all. You will be able to pay just a small minimum amount and pay interest on what is left owing. You can also pay more than the minimum amount but not the full amount. There is therefore a lot more flexibility there but you can pay in smaller instalments which are likely to be easier to manage.


The cost will vary between lenders as well as being different for a payday loan compared to a credit card. With a credit card, the borrowing is completely free if you repay the full balance when required. However, if you do not repay the full amount owed, then how much it costs will depend on how long it takes you to repay the card. It could take years if you only repay the minimum and this will mean that you will be paying interest payments every week which could cost you a lot of money. It can be hard to actually calculate how much, as you may not be able to predict how much you will be able to afford to repay each month and if interest rates go up these costs will also go up. Take a look at popular (and reputable) lenders such as Cobra for more information on rates.

With a payday loan you should be able to repay the loan all in one go. With a credit card, although yo have the option to also do this, you can repay less and the loan could hang around for a long time. You may prefer a loan that is cleared quickly.

Are Payday Loans Good or Bad Debt?

Some people like to class debt as either good and bad and they might put certain loan types into different categories. However, good and bad debt can be quite complex and it is not easy to just allocate a certain type of loan into a certain category. Therefore, it can be easier to get a good understanding of what good debt and bad debts are and then you will be able to work it out for yourself.

What is a good debt?

A good debt is when you borrow money for a purpose that will aid you in the future. For example, if you take out a mortgage so that you can buy a home which will enable you to save a lot of money on rent. A student loan is often also put into this category as it will enable you to study to get a job that is better paid so you will make back more than you have paid out on the loan.

It is not always so easy to categorise loans though. It will depend on your own personal circumstance. If you are using the loan to better yourself in some way, to pay for something that will allow you to save money in the long run or something like that then it is normally considered to be good debt. However, you also need to make sure that you choose the right sort of loan for the purpose that you need it for and that you compare lenders to make sure that you pick the one that will offer you good value for money. You also need to make sure that you will be able to afford the repayments.

What is a bad debt?

So simply a bad debt is anything which does not fit the criteria above. So, if you are borrowing money to pay for luxury items that you do not really need and may hardly even use then this would be considered to be bad debt. You may also have chosen the wrong loan type, perhaps borrowing more money than you need or using a loan type that is unnecessarily expensive. Then if you have chosen a loan where you cannot afford the repayments then you will also be considered to have bad debt.

As you can see it will depend on your personal circumstances whether a debt is considered bad or good for you. For example, if two people want to buy the same house and take a mortgage then this could be considered to be good debt for them both. However, if one of them cannot afford the repayments then this will be a bad debt for them and they should have looked to borrowing less by buying a cheaper home.

How do I categorise payday loans?

Categorising payday loans is not simple. Some people might immediately say that they are bad debt because they have had a lot of negative press. However, as explained above it will very much depend on your personal circumstances. Firstly, payday loans are designed to be used in emergencies when you need money quickly and they can be arranged very quickly. This means that if you are in this situation then they might be a good choice. However, they are also designed for those with a poor credit record. If you do have a good credit record then it might be that there are other loans which you could take out which might be cheaper for you. If you do have a poor credit record then they could be the right choice for you. You also need to compare different payday lenders so that you are sure that you are taking out the one that is best for you with regards to the price and other factors. One of the most important determinants of whether it is good or bad debt for you is how well you are able to repay it. A payday loan normally has just one repayment. This is a lump sum which includes what you have borrowed and the lenders charges. You should be able to find out how much this will be before you take out the loan and you will then be able to decide whether that is an amount that you will be able to afford. The lender will ask you to set up a direct debit in your bank account for the payment to go out when you get paid. This means that you should have the money available in your bank account in order to cover the cost of the loan. However, you still need to think about whether you will have enough money left to pay all of your other bills for the rest of the month. This can be quite tricky as we are not used to having a large lump sum go out of our bank account in a month. So, make sure that you do some calculations to check this.