Are Overdrafts Even a Good Idea?

It can be wise to think about whether having an overdraft is even a good idea for you. We are all different in our approach and attitudes towards money, so this is not a question that has one answer to suit everyone. However, having a think about what you feel about this and understanding more about how they work, what they cost etc will help you to decide whether they will be a good idea for you or not.

How do Overdrafts Work?

An overdraft is a way of borrowing money which is associated with a current account. Not everyone will be offered one as some types of account will not have them and also banks will check your credit record to see if they are happy for you to have one. They will then give you a credit limit which is the amount that you will be able to borrow up to and this will vary between banks and they may also base that on your credit record and salary. You will then be able to borrow up to that amount of money at any time by just spending it through your current account. So, you could take the money through withdrawing cash at an ATM, writing a cheque, spending in using a debit card or transferring it. So, it is flexible and means that it is quick and easy to get the money.

The repayment is quite different to other loans such as payday. There is no repayment schedule or anything like that but the overdraft will be automatically be repaid as you put money in the bank. So, when you get paid or whatever, the money will pay off the overdraft.

How Much do They Cost?

Overdrafts have fairly recently been regulated with regards to the way that banks charge for them so you may not be aware of the new rules. Things have been changed to make them much simpler so instead of a mix of fees and interest, now it is just interest that is charged and the same level for all borrowers. Banks vary in how much interest they charge, but it tends to be between 35% and 40% for most. Therefore, you might want to look around and compare them, although it is often a temptation to just stick with the bank that you are currently with because it is easier.

This cost is pretty high compared with other types of loans and so it is a good idea to think hard about whether they will be a good idea for you or not. They can be good as a back up plan for emergencies, so if you suddenly need money, you could use them to help you out. If you have time to organise a loan, then it will be better to look at alternatives and compare prices first to see whether there are any cheaper options available for you. It is always wise to do this because you never know whether you are paying more than necessary until you do a proper comparison.

Are They Worth it?

It is also worth considering whether having an overdraft will just be too much of a temptation for you. Some people will know that they have that money available and will feel like they should spend it. They might want to use the money to treat themselves. If you think that you might do this then it is worth thinking about whether you should really get an overdraft at all. It could be risky as if you use the money like this you will then have to pay lots of interest and somehow find the money to repay it as well. However, if you know that you will just use it for emergencies then you will not have this risk.

Author: Ken

I really enjoy writing and especially about money. This is because I know that it is a topic that many people have problems with. I hope that my articles will help people to have a better understanding of money and how they can make better decisions with regards to what they do with their money. This will allow people to be able to feel more in control of their money and hopefully have more to spend on the things that they want. It is not always easy to make changes, but if you know what changes you could make that will help you, then this can be a step in the right direction.

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