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.
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.
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.