Overdrafts

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.

There are many of us that might consider asking for a larger overdraft. This is something which could be useful but there are always problems that could occur as a result. It is wise to think hard about this decision so that you make sure that you are making one that is right for you.

Advantages

It is good to think about what you might gain form extending your overdraft. Of course, you would have access to more money, and this means that if you have an emergency and need money then there will be more there. If you max out your overdraft a lot, then it will mean that this will not be so likely as you will have more money available to you. If you often go overdrawn and then get an emergency, it will mean that there is more of a chance that you will have more money available to pay for any emergencies that come along. It can give you peace of mind to know that the extra money is there and that you will not be so likely to struggle to make ends meet as there will be money available to help you.

Disadvantages

Overdrafts cost money and for as long as you have money overdrawn you will be paying for it. Overdrafts tend to be charged at 35% – 40% interest which is pretty high compared to some other loans as well which means that you will also be paying quite a bit for the privilege of having this money. You may also find that because you have the opportunity of borrowing you will not budget so carefully because you know that it is there to fall back on. While it can give peace of mind to know it is available, you should still work hard to make sure that you only use it if you really have to. Some people will be better at this than others. Some may just be tempted to spend it because it is there and if you feel that you are likely to do this, then it could be a good idea to avoid getting the extension to the overdraft. If you are tempted to use it, then you could just find that you will get into debt frequently and then struggle to manage to pay it off and pay for everything you need the following month. It can be very easy to get into debt difficulties if you are not careful and keep a close eye on your spending. Therefore think about whether you are likely to budget and keep a close check on everything or whether you think that there is a chance that you will get into trouble and end up spending a lot more than you can afford or just buying more than you need and paying a lot of extra money due to the interest you are charged for doing so.

You will also find that if you keep going overdrawn it will show on you credit record. If you have access to more money then you will be likely to get overdrawn for more money and this will mean that it looks even worse because anyone looking will see that you are borrowing more and more. If you then want to get a mortgage or rent a home, you may find that this will put off those looking and you may find it difficult to find a good home or to borrow money in the future. It is therefore worth keeping this in mind as well when deciding whether to extend an overdraft.