Overdraft

Is it Wise to Use Your Overdraft?

Many people have an overdraft with their current account. This is an opportunity to spend more money than they actually own without having to specifically request it. You will have an agreed amount that the bank will let you borrow at a certain interest rate. Anything above that will not only be charged for at a higher interest rate but there will also be additional and often very high, charges.

Whether it is a good idea to use your overdraft will normally depend on what you need to borrow the money for and what alternatives are available to you. It is always wise to keep an eye on your current account balance and make sure that it is not going overdrawn without you being aware. It is always a good idea to know what is on there, what is due to leave the account and when so that you do not accidently go overdrawn. You can do this using some ATM’s, online or telephone banking or by speaking to your branch regularly.

However, if are sure that you need to borrow some money, then it is worth looking at the different types of credit available to you. There are many types of loan and an overdraft can actually be quite expensive compared to some other types, but it can depend on how much you are borrowing and how long for.

If you are just borrowing up to the agreed amount on your overdraft and then it is all paid off when you next get paid, then the cost may not be too expensive. However, if you go beyond that agreed amount into an unauthorised overdraft then the combination of interest and fees can make it one of the most expensive ways to borrow money. This means that you need to be very careful. It is always worth comparing costs of borrowing anyway so that you use the cheapest method.

One potential problem with an overdraft is that there is no necessity to pay it back quickly. With personal loans, for example, you will charged a certain amount each month which will cover the costs of the loan as well as repaying the money borrowed. With an overdraft it just gets paid back automatically when the current account gets credited with money. This may not happen very quickly and it could mean that the loan goes on for a long time. You may also find that even if you pay it back quite quickly, it will leave you short of money the next month and you will borrow again. If this happens for many successive months the cost can get so high that you could end up being in debt all of the time.
An overdraft can be very easy to use as well. You do not have to arrange it with the bank every time you want to use it and this means that you can just use it when you need it. This could make it too easy to use. Some people even see it as their money that they can spend and then end up wondering why they have so little money as they have not allowed for how expensive they can be to pay back.

It is worth remembering that borrowing should normally only be done in an emergency. This means that if you can go without things and therefore not go overdrawn, you should try to do this. Obviously we have to pay certain bills and feed ourselves, but often people go overdrawn because they are buying too many things and not keeping track of how much they have spent. It can be worth writing down your purchases, your regular bills and your income so you can make sure that you are not overspending. If you keep a close eye on your current account then there should be no reason why you should go overdrawn.

So it can be wise to use an overdraft if you need money quickly and have no other way to get it. However, as it can be an expensive way to borrow it is best to try to avoid borrowing at all or using a cheaper form of lending if you can find one.

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