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There are lots of different ways to borrow money and we may ask ourselves whether some ways are better than others. It is good to understand that different types of borrowing ill serve different purposes. Therefore, it will depend on our specific need as to whether an overdraft, for example will suit us. Therefore, it is good to know what the particular loan will offer and then we will be able to work out whether it will suit our needs.
Features of an Overdraft
An overdraft is offered as part of some current accounts to some people. The amount you can borrow will vary depending on the bank and it may also be determined by your credit score. It tends to be a relatively small amount – perhaps a few hundred pounds to a few thousand. It may also depend on what you ask for as there may be some room for negotiation with regards to how much you can get. The overdraft is only borrowed for a very short amount of time normally. As it tends to be on an account where you get money being paid in regularly, then when that money is paid in, it will repay the overdraft. There is no repayment schedule as such but it will just be repaid as soon as money gets paid in to the account. The money is access easily – as soon as you spend everything that is the account you can then use the overdraft which means that you will not need to apply and wait for the money, once you have organised the overdraft initially. The fee structure of overdrafts has recently changed and now lenders are only allowed to charge interest and no fees and just one rate so it is not confusing for borrowers and they can easily compare banks. It means though that the rates tend to be pretty high and are 35% to 40% APR which can be quite high compared to some other types of borrowing.
When is it Good to Use Them?
As the rates are pretty high it is good to try to avoid using overdrafts all of the time. However, it can give peace of mind to know that they are available to you if you need money in an emergency and that is really what they are designed to be used for. There are some people that have large overdrafts and leave unpaid for a long time. There is no pressure to repay the overdraft which can be good for people who do not want to panic about debt and want to repay it at their leisure but it does mean that you can leave it outstanding for a long time and this could mean that you will pay a lot in interest. It is therefore really important to make sure that you do only use them when necessary. If you want to borrow money for a long length of time, then there could be other ways to do more cheaply and it is well worth investigating these to see whether they will work out for you. However, if you need money really quickly, you may not have time to wait and organise a loan like this so the overdraft could help, but make sure that you repay it as soon as you can. It will repay automatically when you get paid, but it is sensible to think about whether there are ways that you might be able to do this more quickly. Perhaps by finding earning opportunities that will enable you to get some money before you get paid. This could include a salary advance, freelance work, online surveys or even selling things that you own and no longer need. It can be worth doing some research in to all the ways that you could earn money, but make sure that you use a reputable company that you know will pay you.