An Overview Of Overdrafts And Their Alternatives

June 21, 2023

Can overdrafts support you in overcoming a temporary cash crunch? The answer to this would be yes, but you will be extracting money from your current account. This is also a popular form of credit among the Britons.

For example, after covering all the necessary expenses, the money left in your account is £ 60. You need to complete an urgent payment which is also £ 60. When you take out this amount from your current account, you are availing of the overdraft facility. Your account will then have -a £ 60 balance.

Overdrafts are one of the most used forms of debt that people draw out. Still, some of you might not have the clarity on these loans. Do not mistake it for quick loans, conveniently used to manage pressing cash challenges!

You can use the former by using your own account and according to the terms and conditions of the bank. The latter one needs you to borrow from a loan provider. You will have to comply with the criteria of the lender.

Depending on the situation you are facing, you have to decide if you should get an overdraft facility or not. In some scenarios, you might have to consider alternatives to overdrafts also. Complete reading this blog to have an overall understanding of it.

Everything about overdrafts

As you know, it will be linked to your bank account. Whatever you will withdraw, it will be from your account directly. Here also, you are accountable for paying interest on the amount you will take out.

Unlike mini text loans, which carry interest on the total amount, you will have to consider paying interest on a daily basis. Another difference is that you can simply send a text to apply for and get loans in the first case. On the other hand, you can use the balance available in your bank account to get an overdraft.

The contents of this guide are:

  • Accessible types of overdrafts
  • The cost structure for overdrafts
  • The usefulness of the overdraft facility
  • A good alternative to overdrafts

Accessible types of overdrafts

Your creditworthiness will be a critical element. The meaning of utilising this facility is that your bank has permitted you to withdraw the balance from your account and accept debt. In some cases, you do not have to take permission from the bank and can automatically get overdrafts.

At the same time, there might be some banks that will need you to seek permission first. After that, they will want you to consider a few terms and conditions to take advantage of this facility.

Your income and expenses will play a vital role in defining the repayment term (as per demand). Check if the bank has a set overdraft limit or not. You will have to borrow based on that limit only, and in some cases, you can exceed the limit provided your bank has agreed.

In this regard, you must be aware of the forms of overdrafts available around you.

Arranged overdraft: Here, every term and condition will be pre-decided between you and the bank. You can borrow money from within the agreed limit. Some finance providers facilitate interest-free buffering periods for a certain amount of overdraft.

Unarranged overdraft: This form of overdraft is an unplanned one. People use this overdraft facility when they shell out more money or go overdrawn. In simple words, it means exceeding your arranged overdraft limit. It will be an unapproved credit.

The cost structure for overdrafts

Clearly, the cost of arranged overdrafts would be less than the unarranged ones. You will have to meet an additional fee for unarranged ones besides the typical interest charges. However, both will comprise a flat rate.

The bank might charge you an overdraft fee in manifold ways. You can use the calculating tool provided at the bank’s or lender’s website for a general idea. Make sure to have a closer look at the overdraft facility so that you do not have to pay more at the end.

Typically, arranged overdrafts will include interest varying from 20% to 50%, calculated on a yearly basis. Exceeding the interest rate in the case of an unarranged overdraft is no longer possible for banks. However, they can charge rates variedly depending on the type of overdraft you consider to have.

Checking with the bank about the fees ahead of using an overdraft is a good idea. You can work out the amount you will have to repay ultimately. Preventing the additional payout for overdraft fees is possible.

How? You need to open a bank account that allows fee-free overdrafts up to a certain limit within which you might borrow. In addition, you can avail of a free service wherein you will receive email reminders from the bank once you come very close to the overdraft limit. It will be available for you from the bank’s end.

The usefulness of the overdraft facility

You can count on it if you are running through a short-term temporary crisis. It can be the repair or replacement of a tyre, getting medicines for your parents, purchasing groceries when it is already month’s end with no money in hand etc.

It means you can use this financing provision to cover expenses you have not budgeted for. You will not face difficulty in repaying if you use it sensibly and after planning. Filling up funding gaps is easy and convenient as you can get a suitable amount of money from your account for petty requirements.

The limit for arranged and unarranged overdrafts will be different, while the latter will invite fees on per day basis. Do you know you can fetch this facility by sending out a request? You just have to contact your bank to arrange everything for you.

Call your bank directly or visit the branch to communicate your concern. You can even use the banking app or online banking facility.

A good alternative to overdrafts

People oftentimes prefer having this facility for sailing through a financial emergency when stuck between paydays. Does this make overdrafts the best option? It will totally depend on the type of financial situation you are dealing in with currently.

From the price perspective, overdrafts might seem like a comfortable option. Have you considered the approval chances? This facility might not be available with your bank account if you fail to fulfil some specific criteria of the bank or lender.

On the other hand, the high acceptance rate of payday loans depends a lot on the borrower. The flexible criteria of these loans let people borrow money and repay with the next month’s salary.

Besides, you will have to bear the higher cost if the unpaid overdraft amount is huge. The total cost might exceed the cost you have to accept for the other short-term financing option. It is because these loans add up capped fees, interest charges and a definite period for repayment.

The best thing about getting a loan is that you also do not have to worry about credit scores. You can get in touch with Florafinance to avail yourself of the pre-approval facility for a better understanding of the loan price.

The bottom line

You can get hold of whatever form of credit suits you best. Do not forget to research and shop around to have your best bet. Overdrafts and loans are, after all, debts, so handle them responsibly.

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