Should I Extend my Overdraft?

Many of us have overdrafts and the bank or building society will set the credit limit, meaning that we will only be able to borrow a certain amount. However, at times, they might offer us the option of being able to make that amount larger or we might consider requesting one or even switching to a bank that will give us a larger one. However, it is worth thinking this decision through carefully as it may not be the best for us.

Cost

If we have more money available to us, then it is very likely that we will spend it. This means that we will have to pay more out as we will pay interest on the overdraft as soon as we take it out. We need to think hard about whether having the extra money will be worth it. If we think that we will be tempted to use it when we do not really need to, then we might end up paying out a lot in interest which we could have avoided by not taking the opportunity to have a larger overdraft.

Peace of Mind

It could be that having the opportunity to borrow more money could mean that we will feel better. Knowing that we have access to money if we need it could give us peace of mind. If we suddenly need money, then we may not have the time to arrange a loan and knowing that it will be there if we need it could help.

Credit Record

When you borrow money it will show up on your credit record. This is not always a bad thing, if you can show that you are repaying your debts. However, with an overdraft, there are no regular repayments or pressure to repay, which means that there is a possibility that the debt could go on for a long time. This means that you need to be aware of this and make sure that when you do borrow money using the overdraft, that you do have a plan for repaying it and make efforts to do so as soon as you can. An overdraft will be repaid as soon as money gets paid into your current account. This means that when you next get paid it will be paid off but you need to think about whether that money will be enough to repay the overdraft and leave enough to pay for everything else that you need to buy as well, or else you could end up having to go overdrawn again. If you do this each month, you may get to the stage where your salary is not enough to repay the overdraft and there will be nothing at all to pay the bills, so make sure that you are careful.

Spending Spree

Some people feel that an overdraft is their money to spend. That they can go on a spending spree and treat themselves to all sorts of things with it. What they do not think about is the fact that the money is a loan and belongs to the bank and not to them. Not only does it need to be repaid but it will also be charged for. This means that for as long as people are in debt, they will be being charged interest and therefore paying for the privilege of having this extra money. It is therefore wise to think about whether you are likely to be the sort of person that will spend it like this or whether you will be sensible and just leave it for emergencies and use that to help you decide whether it is a good idea or not.

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What are the Cheaper Alternatives to Overdrafts?

It is always a good idea to compare borrowing options before you actually borrow any money. This is because you will otherwise find that you could end up spending more money than necessary. Sometimes the interest rates, costs and fees of borrowing can be very much more expensive for some types of loans than others and although they may provide a very different service and that explains the cost, it is good to make sure that you feel they are offering good value for money. So, with an overdraft, you will find that it is extremely convenient to use once it is arranged as you will be able to get the money as soon as you need it. However, you may feel that the 35% – 40% interest rates are too high and that you would like to try to find something cheaper. There could be some enticing alternatives.

Credit Card

Some credit cards do have very high interest rates but some will be cheaper than an overdraft. You will have to take a look and compare them t make sure that the one that you are choosing is lower. A credit card can be handy for when you are buying online or from high street shops as most will accept them as a form of payment. However, if you use a credit card at a ATM then you will often be charged and you will have to start paying interest on that withdrawal right away, which means that you will find that it is an expensive way to get cash. However, when you use it in shops and online, you will be charged no interest immediately. You will receive a statement and that will tell you how much interest you will be charged and when but you will get the option of paying off what you have borrowed before a certain date and you will be charged no interest if you manage that. You will also have the option of repaying just a small payment which covers the costs and a little more and then you can leave the debt outstanding as long as you wish but you be charged for that.

Store Card

A store card is similar to a credit card in the way that you are charged interest. You will only be able to use it in limited places, normally only in branches of the store that issued it. You will also not normally be able to use it to draw cash. However, you can use it instead of paying for items in that store and you will be able to delay payment until your statement arrives or even longer if you want to pay interest on it. The interest rates could be higher or lower than an overdraft, you will have to check this as they will vary between different store cards.

Personal Loan

A personal loan from a bank or building society tends to have lower interest than an overdraft. However, they might need to be for significantly higher amounts of money. The specific amount will depend on the lender, but often there a large minimum that you will have to borrow. This could seem good because you will have more money to spend, but it means that it could take longer to repay the loan. Even if the interest rate is lower, the loan could cost more because you have it for longer and you are paying interest on a larger amount of money. Therefore, to properly compare the cost, you will need to calculate it in monetary terms and then compare that.

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