Many of us have an overdraft option as part of our current account. This will allow us to borrow money easily if we need it. Basically, if we withdraw money, use a cheque or have a direct debit or standing order leave the account and there is not enough money in there to cover the cost, then we will be able to use our overdraft facility to borrow it. But is this a wise thing to do?
The cost of the overdraft is a really important thing to consider. The charges and interest will depend on the bank that you are worth. However, you will tend to find that you are charged a monthly fee as well as interest on what you have borrowed. This interest will be charged each day you are overdrawn and so how much you pay will depend on how long it takes before you get it repaid. Overdrafts do tend to be an expensive way to borrow money and so you may find that it could be better to organise a different type of loan if you can.
An overdraft can be very convenient. You do not need to organise it as once it is set up, it will always be there for you to use. This means that you will be able to borrow money whenever you need it which can be extremely useful. However, this convenience can be a problem as you may just use it without considering what your other borrowing options are. You could therefore find that you will end up paying more for your borrowing than necessary because you use this more convenient method.
An overdraft can also be considered to be convenient because there is no repayment schedule. You can repay it whenever you want. When money is paid into the account it will automatically repay the overdraft first. This means that you do not have to worry about finding the money to make the repayments or make sure that you have the money needed to pay them which can be easier for some people than having to find a fixed amount each month to repay, like you tend to with other loans.
An overdraft is automatically repaid when you put money into your current account. This makes repayment easy in a way as it happens without you having to think about it. Some people will prefer this to having to make a regular repayment and have to remember to do so and make sure that you have enough money to do so. However, you may find that your money just seems to disappear as it repays the overdraft and you therefore do not have as much to spend as you had hoped. You may also find that you do not pay money into the account that often and you then forget to repay it.
Value for money
It is worth looking at your overdraft in terms of how well it provides you with value for money. You need to think about the balance of the cost and convenience and think about whether you think that it is worth getting one. There are other loans that are quick to organise which might be better or you may already have a credit card, which could allow you to borrow at a lower rate. It is really important to careful compare all of your options, so not only looking at the interest rate but also at any other costs, including late repayment fees to decide which option will be the best one for you.
Therefore it can be useful to have an overdraft and to use it at times, but you need to be careful. It is wise to be aware of how much it will cost you and why alternatives are available. Keep a close check on how much money you have in your current account so that you do not go overdrawn by mistake. It can be difficult, because current accounts do not tend to pay interest on a balance, you do not want to keep too much money in there as you will not get interest on it, but you also do not want to go accidently overdrawn as you will have to pay.
If you do want to borrow money then having the overdraft there can be convenient. However, it is wise to consider all of your options so that you can decide whether this is the right option for you or whether there are alternative methods of borrowing that would be cheaper for you. Make sure that you plan things really well so that you are aware of the costs, repayments and things like that so that you can pick the option that will be the most convenient for you but will also give you good value for money.