Category: Overdrafts

How to Decide Whether to Borrow Using an Overdraft

An overdraft is something which many current account holders get offered. It works so that if you spend more money than is in your account, you can get a bit extra using the overdraft. There will be a set amount that you can use, although some people also get an unauthorised overdraft by borrowing more money than they have arranged with the bank or by borrowing when they have not been offered an overdraft.

In theory they do sound like a useful way to borrow money in an emergency because it will just be there for when you need it. You do not have to apply and so it will not matter if your bank is not open, you will be able to get your hands on the money. You can even take it straight out as cash if you use an ATM to get it. However, this could mean that it is too easy to get. If you do not regularly check the balance of your current account then you may accidently draw out too much money and find that you go overdrawn by mistake. This is easy to check with a cash machine, as you can normally request a balance. However, if you are using a debit card or forget to check the balance then you may find that you easily go overdrawn.

It is worth having a good understanding of how charges work for being overdrawn as well. You could be forgiven for thinking it is quite cheap, but most overdrafts are actually very expensive. Make sure that you check first if you are considering using one as you may find that a credit card or even some short term loans will be cheaper. You will not only pay a flat fee but also a percentage of interest. This will be charge on any money owed until it is paid back. You may find that you have to keep borrowing more until you get paid and so this could be quite a long time. Some people find that they use their overdraft every month and because of the charges they may have to borrow money further and further away from their last payday so they have more and more interest added until the debt gets so big they cannot pay it off when they get paid. In order to try to stop this you will have an overdraft limit, so there will only be a certain amount that you can borrow. However, sometimes it is possible to still borrow more than this and have what is known as unauthorised overdraft. This also occurs if you borrow money and do not have an overdraft arranged at all. An unauthorised overdraft is much more expensive and with the fees and interest added together they can be dearer than payday loans.

Another problem with an overdraft is that there is not a big pressure to pay it back. Obviously the costs are enough to motivate some people to repay it as quickly as possible, but unless you look at your statement, you may not be able to see these. If you do not have access to online banking or a cash machine, you may not even be aware that you are overdrawn. If you do not check regularly, then it could be worth seeing if there is a way that you can or make sure that you have a big buffer of money in the account to prevent you from going overdrawn. You will not be asked to make repayments, but as soon as money is credited into your account it will be used to pay it off.

Like any other type of borrowing you therefore need to think very carefully before using an overdraft. You need to decide whether you really need the money or whether you can manage without it. It will depend on what you need to spend it on and how long you can wait before you have to get it. Also consider the different costs of different forms of borrowing and work whether it might be better to use a credit card, for example. You may have other channels available to you and it could be better to use them, if they are cheaper. It can be difficult to find the time to do this sometimes, particularly if you are in a panic about getting money quickly, but it is well worth trying to be calm and carefully consider your options.