There are all sorts of different options available for us to borrow money. Some people will have more available to them than others, but many of us will have an overdraft. An overdraft is often offered as part of a current account and is therefore there for us to use when we need to. However, just because something is available, it does not mean that it is necessarily something that we should always be using. It is a good idea to think about whether the overdraft is a good way for you to borrow.
How an Overdraft Works
So if you draw out money form your current account, either by direct debit standing order, cheque, cash or debit card, you will have a limit as to how much you will be able to take out. This limit is not the amount of money that is in the account but it is the amount plus the overdraft. Therefore, the overdraft will give you access to some extra money that you do not have. You will just be able to help yourself to this money and use it as you see fit. There will be a limit as to how much you can have and different banks will have different limits set. This limit will be an individual thing and even if you are with the same bank as other people that you know, you could find that your overdraft will be a different amount to them. This is partly because you will have a different credit rating but also might be based on your income, how much activity goes on in your account and other conditions that the bank uses to decide these things. Once you have borrowed some money, you will start being charged interest. This tends to be between 35% and 40% but this will vary with lender and the type of current account that you have. You will not be under any pressure to repay the overdraft, but as soon as money s paid into your account, perhaps form a salary going in, the overdraft will be repaid or partially repaid with this money.
What it is Best for
Overdrafts tend to be for relatively small amounts, perhaps hundreds or maybe thousands of pounds. This means that they cannot be used to pay for extremely expensive items. They are also designed to be short term, as they get repaid quickly. They tend to be expensive compared to some types of loans and so that is something that you need to be careful of. Make sure that you compare the costs so that you know whether you are paying more than you could be. They are very quick though and can therefore be very useful when you need money in an emergency. So, if you run out of money and you need to pay a bill or buy food or something like this, then it can be reassuring to know that the money is there. As you are more likely to run out of money towards the end of the month as well, then it can be handy to know the overdraft is there and you will repay it more quickly as it will be closer to your pay day. It can be tricky at times though, if you have not budgeted properly you may accidently go overdrawn. It is therefore wise to make sure that you always keep a close check on how much money you have in your current account and then you will be able to make sure that you do not accidently go overdrawn. You do not want to do this as it will be expensive and it will be better to plan your spending carefully and make sure that you do not overspend by mistake and have to pay this extra money without planning to.