Overdrafts Archive

  • Should I Use my Overdraft?

    Most people that have a current account will automatically get an overdraft offered to them so that they can use it if they need it. However, you might be very wise to think about whether you should use it or not before you just automatically take money from it. There are a number of good reasons for this.

    Cost

    Although it can be a very convenient way to borrow, it can be expensive compared to other borrowing options. This means that it is really important that you check out the price of it and compare it to other things. Many overdrafts are charged with an interest rate of 35% to 40%. This interest rate will be the only charge though as they are not allowed to charge additional fees. Make sure that you look at the costs of alternative ways of borrowing so that you can check whether you will be able to borrow I a different way for less. It is worth the effort of doing this because it will make a big difference to what you are paying.

    Limitations

    It is also worth being aware of some of the limitations of borrowing this way. Firstly, you will only have a certain credit limit and you will only be able to borrow that amount. All loans have this, but an overdraft could be particularly small compared to some other ways of borrowing. Therefore, you need to think about how much money you want to borrow and whether the loan will provide you with enough money to cover that cost.

    It is also worth thinking about the fact that the money is repaid as soon as money enters the current account. This means that it may be paid back quicker than you had hoped for. For example, if you get paid, you may have been hoping to use the money for certain things, but it will repay the overdraft first and there may not be enough left to pay for all of the other things that you wanted.

    Alternatives

    There are other ways that you can borrow money which might suit your needs better. For example, a credit card will allow you to buy things and not pay for them immediately. If you repay the money before a certain date, you will not even have to pay any interest at all. You can also choose to just repay a very small amount and you will be able to leave the rest until you can afford it. However, you will be charged interest if you do not repay everything, but it could be less than that charged on an overdraft. It will vary and you will have to check with your card issuer as to whether this will be the case for you. If you want to borrow a larger amount then it could be better to use a personal loan. These tend to need to be repaid in monthly instalments and so you repay the money back slowly so it is manageable. The interest can be longer, but because you repay over a longer time period then you may end up paying more in monetary costs in the end. Therefore, you will need to compare the total cost of the loans and then you will be able to accurately see which one will cost you the most money. Of course, an overdraft or credit card does not have to be repaid within a certain time and so you will have to estimate how long it will take you to repay it in full in order to calculate the cost, which can be a bit complex.