Seeing Red: Getting hold of your overdraft
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Even the most cautious budget-follower can overspend every now and then. One of the ways many people tend to overspend is by going overdrawn on your current account. However, by doing so without the bank’s permission you are likely to receive a nasty shock when your bank statement appears. Remember that unauthorized borrowing from your bank account is not only unnecessary but expensive too. With a bit of careful planning in advance, you will be able to avoid an overdraft which is not authorized.
With the high competition in the account market these days, if you are already overdrawn, you might be paying more in charges than you should. Shopping around for a cheaper overdraft, even by switching from your current account, is a beneficial way to save on money. This will enable you to clear your borrowings more easily, In order to choose the best overdraft for your needs, you need to understand what it means when you slip into the red. When you spend more than you have in your account, you are using the bank’s money instead of your own. This action is charging you a high interest. The interest varies between banks and also on whether you requested the bank’s permission for being overdrawn. By requesting permission, or making an authorized overdraft, you can save money. Ask for your bank’s permission as soon as possible. Once you get short of funds and need some more cash, fill out a form to put your request in writing. According to your status, the bank will decide how big your overdraft can be. Sliping into the red without notifying your bank is not advised. The reason is that most banks have punitive interest charges. You might end up being charged with other fees and charges on top of that.
If your overdraft is authorized, you pay half as much as you would end up paying on an unauthorized one. For example, HSBC as of 2006 has an overdraft interest rate of 14.8% when authorized or unauthorized. However, Barclays has 15.6% overdraft interest rate when authorized, but has 27.5% when unauthorized. Barclays, Lloyds TSB, NatWest and other banks have similar overdraft interest rates in these situations. Be cautious not to exceed your authorized overdraft. If you do so you may be charged the higher, penalized rate on the entire amount of money you are overdrawn, without consideration of your authorized limit.
Once you find out how interest calculation takes place in your bank, you can find a bank that will not overcharge you with a high interest rate on the total of your borrowings.
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Being able to take advantage of an overdraft facility does not necessarily mean that you need to do so. Overdraft may be a convenient way or borrowing money, but there are some disadvantages. For example, too much flexibility may make it too easy to slip into the red zone. If you see red without the bank’s authorization beforehand, you will be penalized heavily.
Another problematic situation is when you borrow small amounts of cash in the short term, and get sung by high interest rates. Add the monthly fees and arrangement fees to the list and your charges will become particularly high. Moreover, when you don not have a scheduled repayment, you are in danger of staying in a situation of a never-ending overdraft. Keeping your overdraft from becoming a permanent situation is becoming increasingly difficult.
Overdrafts are good for short term borrowing of very small amounts of cash. However, if you need to borrow cash for a longer period of time, having an overdraft is not the best answer.
Even if you have an authorized overdraft, you might end paying more than you would on a personal loan. By considering the amount of cash you truly need and the period of time it will take you to repay it, consider finding a cheap personal loan. Structured monthly repayments may help you in clearing your debt more easily.
