An overdraft facility is provided alongside many current accounts. Most people will have an agreed overdraft amount with their bank and will be able to borrow this amount and be charged interest on that borrowing. If they borrow more than this or do not have an agreed overdraft, they will be charged a lot more in fees as well as interest. Although overdrafts always have charges, there are times that they can be really worthwhile.
Running out of cash
The main reason that people use an overdraft is for when they run out of cash. This could be at the end of the month when they are waiting to be paid or if they get unexpected bills. If you have money in a savings account and do not have time to transfer it over before you need to pay out for things, the overdraft can help to keep you funded until the money arrives. As an overdraft is expensive, it is best to do this as infrequently as you can. You want to have it there as a backup, just in case you do run out of money, but it is much better to carefully budget and make sure that you have the money available when you need it.
As an alternative to more expensive borrowing
There are many different ways to borrow money. They all have costs and some are much more expensive than others. It is good to use the cheapest possible option available for you. If you need money really quickly, you do not have time to organise a personal loan, which can be a cheaper way of borrowing then using your overdraft can be a solution. Obviously it depends how much money you need, but it could provide some money while you are waiting for a loan application to be processed. If you have a poor credit record and cannot get a cheaper loan and need money quickly then an overdraft could be a cheaper option than some other types of borrowing. It is worth investigating the costs though as an overdraft can be very expensive particularly if it is an unauthorised overdraft.
For peace of mind
Having an overdraft facility can give a lot of people peace of mind. Knowing that there is money there that you can spend if you need it can be very reassuring. Many people never use their overdraft facility because they budget well and ensure that they do not spend more money than they have in their account. However, they do enjoy the peace of mind that they get knowing that they have that option there if they need it. It means that if they ever are in a situation here they need money and they do not have it, they have a loan that they can use without having to arrange anything. It is instant and therefore you know that it will be there when you need it.
There are a lot of people that do not use overdrafts like this though. They use them when they do not bother to budget or if they want to treat themselves to a few things but cannot afford them. This is not a good way to use them. The cost of an overdraft is high and although it will be repaid as soon as money enters the account, it still can last quite a long time and the costs will mount. You are charged daily and so the sooner it is repaid the better. Some people find that they get overdrawn every month because they keep spending more than they earn and they use the overdraft to help them. This can lead to them borrowing more and more money or getting overdrawn sooner and sooner after they are paid and this can lead to big problems financially.
Overdrafts are an expensive way to borrow and so if you can find an alternative you will be much better off. It is worth researching costs of borrowing as soon as you can and then if you do need money you will be aware of how much different options will cost you. Remember to consider how much you are likely to borrow and how long for as this will have a significant impact on the total cost.
So only use an overdraft if it is the cheapest option that you have available to you. Only use it in an emergency and make sure that you pay it back as soon as you can. Use it as peace of mind rather than a resource that you keep tucking in to and you should spend as little as possible on it. It can be tempting to think that it is just money that is available for you to spend and although it is, you will have to repay it and pay back fees and interest as well, so it is an extremely costly way to buy things.