When it comes to an overdraft advantages and disadvantages are often found in equal measure.
In fact, for almost every advantage (such as providing a safety net for when things get tight) there’s an equal disadvantage (interest rates, for example) – that’s why it’s important to know all of the facts before you make a decision about getting an overdraft.
Overdraft advantages and disadvantages
OK, we’ll get the bad bits out of the way first. Of all of the overdraft advantages and disadvantages, there’s one thing that should always be considered before you get an overdraft: the interest.
Sure, there are other things to consider – your overdraft limit, the fees if you go over the limit and the effect that it has on your credit score – but the main thing to consider is the interest on your overdraft. If you’re lucky, you can get an interest free overdraft (although, these are usually only given to students). If not, you’ll be charged interest on the amount that you’re in your overdraft, which can lead to a cycle of getting out of your overdraft and falling back into it.
Overdrafts, at times, are very tricky things to pay off – if you live out of your overdraft, then it’s almost impossible (save for some thrifty budgeting) to get back out of it. In some instances, it might be better – and work out more economical in the long run – to take out a personal loan for the amount that you need.
On top of that, according to the Money Advice Service, another reason that an overdraft isn’t safe for long-term borrowing is that it’s not guaranteed. They say:
“The bank could withdraw it at any time and leave you without the cash you thought you had access to. However, if your bank cancels your overdraft with no warning and you incur charges as a result, you may have grounds to complain. If you complain to your bank and you aren’t satisfied with the outcome, you can take your complaint to the Financial Ombudsman Service.”
Now we’ve got that out of the way, we can look at some of the advantages.
For those who don’t need to borrow a large amount of money, overdrafts can provide peace of mind and a safety net. If there’s a problem with your wages or you’re running short at the end of the month, those bills, direct debits and outgoings will still be processed and go through, without being declined or missed.
(In fact, having an overdraft can shield your credit score – a missed payment on your credit report can have quite a negative impact on your ability to qualify for a loan or credit card. On top of that, you avoid the often quite hefty fees associated with a missed payment.)
In times of trouble, the overdraft can act as a source of quick cash – you needn’t apply for a loan or credit card, you have a well of money that is available for your use.
However – be careful – for all of the overdraft advantages and disadvantages, this one is important to remember: the money isn’t yours. Considering it ‘extra money’ that you can dip into is a slippery slope that is often difficult to back out of – once you’re in the hole for your monthly wages (and therefore permanently living out of your overdraft) it can be very difficult to get back into the green.
As with any financial undertaking, at Bamboo, we recommend that you carefully consider every option. For those looking for a safety net, an overdraft is often a safe and sensible option. However, for those in need of a little more assistance, it’s often easier and cheaper to take out a loan with fixed rates.