An overdraft s something which many people have available to them on the current account. However, there are some people which refuse to have an overdraft – so are they right to do this?
Some people are rather afraid that if the option of borrowing is available to them then they may just overspend and end up paying dearly for it. If you have ever had debt before you may understand how they felt, wondering whether they would ever get back out of debt again and never wanting that helpless feeling of owing more money than they felt they could afford to repay. There are people that are worried about being in debt and they have never had any debt. They do not like the idea of owing money to anyone and so do not want to be given the opportunity to do so.
An overdraft is different to other debt in that the bank allows you to borrow money if you wish. This means that if you suddenly need money, you can borrow using your overdraft without having to wait to negotiate a loan. This can be useful as other loans can take a significant amount of time to arrange and you may not be able to wait this long. If you do not have an overdraft facility and overspend, you will then have an unauthorised overdraft. These are much more expensive than an authorised one and therefore you could end up paying more than necessary for the loan. This means that if you have an overdraft and make a mistake like this, it could be a lot cheaper for you.
The problem with an overdraft is that there is no formal repayment schedule. The lender will just repay it when money comes into the current account. So whether enough to cover the debt or small bits and pieces come in, they will all be taken by the lender until all of the debt and the outstanding interest and any charges are paid off. Although this means it could be repaid more quickly than with some other types of lending, it does mean that you will have access to no money until it is paid off. Also, if it takes a long time before any money appears in your bank account, you will be paying a lot of interest and charges. Some overdrafts have a one off charge then charge interest, others charge per day that you are overdrawn. It is worth finding out what the charges would be by your current account provider so that you are aware, should you ever need to use it.
So it is probably worth having an overdraft on your current account to use for extreme emergencies unless you feel that you cannot trust yourself not to use. If you think that you will be tempted to use it, because it feels like you have extra money to spend, then cancel it as this should help you to keep better control of your spending and you will be less likely to borrow money when it is not really necessary to borrow. However, if you will not be tempted to spend it unless you really need to, then it could be a good idea to get one. It means that if you accidently go overdrawn or you need money for an emergency, you will have a fund there to use which will be cheaper than an unauthorised overdraft. However, as an overdraft is so expensive, it can be better to look into other forms of borrowing, if you need money and can wait a while before you need to spend it. It is also wise to always monitor how much money you have in your current account to make sure that you do not go overdrawn by mistake. Make sure that you know when your bills are due to come out so that you do not get any nasty surprises and try to keep a buffer of money in the account just in case something does take you by surprise. It can also be wise to have some money in a savings account in the same financial institution so that you can transfer money into your current account if you are about to or have just gone overdrawn.