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.

Should I get Several Overdrafts?

There are some people that have more than one overdraft. This is because they have more than one current account which have overdraft facilities and then they can borrow on both. There are pros and cons to doing this and it is well worth thinking through them all before you take out a second overdraft.

Advantages of Having Several Overdrafts

If you have more than one overdraft then you will have access to more borrowing. This means that if you need some money, then you will have two places that you can get it form. If you have already used some of your overdraft, you are more likely to have some left to use for other things. You will also have more money to fall back on in an emergency and even if you do not use it, it could give you peace of mind knowing that it is there. Once you have an overdraft facility set up, you will be able to use it whenever you need to and that means that you have very quick access to money. With an overdraft you can withdraw cash or transfer the money, use a cheque or it can cover a direct debit or standing order which means it is a very flexible loan to have access too. You will not have to wait for the money, unlike other types of loans which need to be arranged first, this can be arranged well in advance or may even just be there when you open your current account. Then the money will be there when you need it or you may never use it at all. It can be good to know that it is there. However, having more than one may be more useful for some people than others.

Disadvantages of Having Several Overdrafts

Although having access to more money could seem like a good idea there are possible drawbacks as well. Firstly, overdrafts are expensive. The interest rate on an overdraft tends to be between 35% and 40% and this means that you will pay out quite a bit for the privilege of borrowing the money. There are cheaper ways to borrow, for example a credit card is likely to be cheaper and a personal loan will be as well. Therefore, although it is convenient and there for you to fall back on, it could be wise to just keep it for emergencies.

There will be some people that will see the overdraft as their money that they can spend to treat themselves to things. This means that as soon as they get the money offered to them, they will start to spend it. This means that they will immediately be paying interest but they might not think about that and just be focussed on the items that they can buy with the money. This could leave them in trouble later as they could end up struggling to pay the interest or repay the overdraft. If they spend the overdraft, then if they do need money in an emergency, it will not be there for them to use. Therefore, it is really important to consider this.

Some people also have tow current accounts with overdraft facilities and have spent the money but only have payments going in to one of them. Payments going into your current account, such as salary and benefits, will automatically repay the overdraft. This means that the other overdraft is not being repaid as no money is being paid into the account, it will just be accumulating interest all of the time. It can even be easy to forget that it even exists. So, it can be a risk having two because you might just forget one and it is easy to not repay it.