Overdraft on Bank Accounts

Overdraft facilities on bank accounts are a tempting alternative to short term loans. They're cheaper than payday loans and instant - if you pay back the overdraft, of course. But they're not always a good idea unless you can seriously say you can pay it back every month.


Overdraft Limits on Bank Accounts

Many banks are now willing to over well over £400 for their overdraft facilities, provided you have a certain amount going into your account every month. This seems like a great extra pot of cash each month, but it's not something to be taken likely; you'll pay interest on what you borrow and your salary will be swallowed up by whatever you dip into. It'll be hard to keep outside your £400 overdraft if you only have a £700 income, and you'll then be paying the usage fee for a long time.

Consider this: if your usage fee is £10 per month and your overdraft is £200 then, in 20 months, you'll have paid an extra £200 on top of the £200 overdraft you've been dipping into. Calculated over a period of time, it doesn't seem like a cheap alternative anymore.


Overdraft Charges

You'll most likely pay a usage fee on your account, which can amount to almost double the overdraft limit if you can't get out of the red. If you go over the overdraft limit, don't expect the standard £30 overdrawn fee - overdraft charges are notoriously higher and difficult to pay back.


Overdraft on Bank Accounts and Interest Free Periods

Some overdrafts have a nice little interest free period, especially those huge student loan overdrafts. However, you'll have to pay back a considerable amount after this interest free period, and for student loans you have to pay back the full amount as soon as your graduate.


Key Tips for Overdraft Facilities on Bank Accounts

As a rule, opt for an overdraft that is 10% - 20% of your income, so if you do fall into the red you're unlikely to miss the money that's disappeared but won't be left short each month and have to dip into your overdraft. If you're always short every month and are always using your overdraft, consider looking for additional income or other long-term personal finance solutions.

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