Overdrafts

If you need some extra money, then often we have a couple of easy borrowing options. If we already have a credit card and an overdraft then we will be able to use these without a great deal of effort. You will not need to work on arranging a loan or anything, because it will already be there for you. Of course, sometimes it is better to use different types of loans and you should think about that option and compare loans to see which will be the best. However, let’s say that you want either a credit card or overdraft, then it is a good idea to understand the differences and therefore which might be the best for you to choose from.

Cost

The cost of these will both vary depending on the lender. However, it is common for overdrafts to cost between 35% and 40% and for credit cards to be cheaper. However, the interest rate does not tell the whole story. It will depend on how long you hold the loan for as to whether one is actually cheaper than the other. Of course, you may think that you will repay them both at the same time, but this may not be the case.

Repayments

The overdraft will be repaid as soon as money is paid into the account – so if you get any interest, pension, wages, benefits or anything like that coming in, then it will pay off the overdraft. With the credit card, you will only need to worry about repayments when you get a statement. Until then most things that you have spent on the card (unless they were foreign purchases or cash withdrawals) will not normally attract any interest or fees. However, your statement will give you a date to repay them by or the amount of interest you will be charged if you choose not to. You will still be required to make a minimum payment but that will be just enough to cover the interest and a little more. What this means is that you may be tempted to not repay it very quickly and it could end up costing you more money because you leave it unpaid for a while. However, if you cannot afford to repay it right away, then perhaps this option could be useful for you.

Credit Limit

The credit limit is the amount of money that you are able to borrow. This will vary with different types of accounts but generally you will find that the credit card will allow you to borrow a lot more money than the overdraft. However, you will need to check and compare the different amounts to see whether there are some which are closer to what you want than others. It might seem a good idea to pick the one that has the biggest credit limit so that you have access to borrowing more money. However, this is not always a good thing because you could find that you will be tempted to keep borrowing money even when it is not necessary and that you will end up getting into problems with debt. However, this will depend on the type of person you are as some people have a lot of self-discipline and would not get into this situation anyway.

So, you can see, there is not really a simple answer to whether a credit card or overdraft will be better. However, it is a good idea for you to think carefully about exactly what you are looking for and then match it up with the loan which fits the best. You will find that lenders vary and so you will need to look at several different ones, in order to find the one that will be the best for you.

There are lots of different ways to borrow money. It is a good idea to find out about the different methods and choose the one that is most suitable for your particular needs. This is because we will not always find that the same type of borrowing will suit every person and every need. Therefore, when you are considering using an overdraft you need to give it some thought and compare it with other types of loans in order to find out whether it is the best loan for what you need. It is a good idea to have an understanding of the basic features of an overdraft and what it tends to be used for so that you are able to work out if it will be the right form of borrowing for you.

How it Works

An overdraft is attached to a current account. Most current accounts will have an overdraft with them but how much you are allowed to borrow will vary between banks. It may not be an amount that is the same for every customer either – it could vary depending on the credit rating of the particular customer. The overdraft works by being available when you need it. So, you use your current account as normal, paying in, making withdrawals, doing transfers, and things like that but if there is not enough money in there to do what you need, then you will be able to draw on the overdraft. It is there to use in emergencies when you need it.

Repayments

The overdraft is repaid automatically as soon as some money comes into the bank account. This means that you do not have to worry about making regular repayments or things like that as they will just happen as soon as money comes in. It does mean that this will take priority so if you other things you need the money for, you may find that there is not enough left after the overdraft has been paid for.

Cost

An overdraft will vary in cost depending on the bank that it is with. However, it will normally be 35% to 40% interest. There will no additional fees at that interest rate is yearly which means that if you owe £100 for a year at 40% you will have to pay £40 in interest for it. Normally you will not owe it for that long, so the interest will be calculated according to how many days you have the overdraft for. This rate is relatively high though, especially compared with the rates of other types of loans.

What it is Designed for

These are designed for emergency borrowing. When you need money fast, they will be available to you. You will also be able to get cash which is something you are not able to get with things like credit cards. It is also a short term loan as it will normally be repaid quickly, when you have money coming into the account.

So, you will need to think about whether you feel that this type of borrowing will suit you. You will find that if you have a good credit score, then you should be able to have access to an overdraft and you might have one already set up for you. It is therefore, possibly all ready for you to use in an emergency, but it might be wise to choose a different type of borrowing as it might suit your needs better. If you have time, then look around at the different options and compare then so that you can be sure that you are picking the best one for you.