A great number of bank accounts include some form of overdraft facility. The purpose is to allow the account holder to access funds beyond what they hold in the account, up to a specified limit. It is essentially a line of credit that you prearrange with the bank for use at those times when you need extra cash. Overdraft facilities are commonly available for both personal and business accounts.
What Is An Overdraft Facility?
An overdraft facility is a feature of many bank accounts that allows the account holder to obtain extra cash from time to time. The amount of overdraft allowed varies greatly from bank to bank and is determined based on numerous factors related to your credit worthiness. Talk to your bank about their overdraft feature and how it applies to you.
Authorised Vs. Unauthorised Overdraft
An authorised overdraft is a spending amount that is prearranged with your bank. You can then overspend your account balance by up to that amount. Some banks charge a fee when you access the overdraft amount while others don’t; in all cases you will be charged interest on the overdraft amount until it is paid in full.
An unauthorised overdraft is when you overspend the amount in your account without a prearranged agreement with the bank. This is a very expensive mistake to make, as most banks will charge you a substantial unauthorised overdraft fee as well as a very high rate of interest on the amount.
When To Use An Overdraft
Overdrafts should not be used on a regular basis as your primary source of borrowing money. They are fine if you need a small amount of extra money every once in a while, but if you find yourself depending on your overdraft every month or on a regular basis you should consider obtaining a regular loan to get your finances back in order. This will cost you less money in the long run because a standard loan will most likely charge a lower interest rate than an overdraft.
The Risks Of Using An Overdraft
If you are prone to overspending and impulse purchases, using an overdraft may not be a good idea for you. It’s quite easy to spend unnecessarily when it’s so easy to access extra money; many people forget that it’s not really their money, it’s the bank’s money and they’re just borrowing it.
The Benefits Of Using An Overdraft
Everyone gets into a pinch now and then. Sometimes an unexpected expense comes along and if it’s at the end of the month you might find yourself a bit short. In this situation an overdraft can be a great help, allowing you to take care of unanticipated items on time and without paying the extremely high fees of an unauthorised overdraft.
Business Overdraft Facilities
Similar to personal overdraft facilities, a business overdraft is a prearranged spending limit with your bank. Many businesses find an overdraft useful for those times when cash flow is a problem for a short period of time. Overdrafts are not a good option for funding larger needs, such as capital or expansion expenses. For these needs it is less expensive to obtain a separate business loan.
Business overdrafts may also be subject to more fees than a personal overdraft. Examples include fees to open the overdraft, to renew the overdraft, or sometimes even a fee for not using the overdraft. If you have a business account and want to make overdraft arrangements make sure you fully understand the costs involved beforehand.
When used judiciously, overdraft facilities can be a great help in managing the occasional financial shortfall. Whether for a personal or business account, always prearrange a spending limit with your bank and make sure you fully understand all of the costs and fees associated with use of the overdraft.