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Overdrafts are a quick and easy way to tide you over if you're short of money, but always agree them in advance, unless a borrowing limit comes with the account!
When you speak to your bank to agree an overdraft, they will set a limit, this is the amount you'll be able to spend up to each month. Some accounts have automatic overdrafts, but check how much the overdraft is for.
How much will it cost me?
- Some banks charge an arrangement fee, though it's less common now - but it can be around £15-20. You may also be charged a fee each time you increase your limit.
- On top of this, you may have to pay a fee of around £5 each month you use your overdraft.
- You'll also have to pay debit interest on the amount you owe.
- If you go overdrawn without agreeing it first you'll incur charges.
- Many accounts have buffer zones, automatic fee-free and interest-free overdrafts.
How can I get a better deal on my overdraft?
- You could choose a bank account with a standard overdraft attached. This is useful if you go overdrawn regularly.
- Don't get caught out. Check the charges and rates of interest before getting an increase on your overdraft.
- If you have to pay a fee for setting up an overdraft, make sure your limit is enough so you don't have to pay again to increase it later.
- Check out the charging periods. If you are overdrawn when one charging period ends and another starts you may have to pay two months charges, even if you're only overdrawn for a few days.
Is an overdraft the best way to borrow money?
If you need a small amount of money for a short time, an overdraft may be the best option, but if it's for a larger amount, a loan may be cheaper. There's also credit cards. Think about the following and then decide.
- How often do you need an overdraft - is it a one-off, or long-term?
- How much do you need to borrow?
- What will it cost you - think of interest charged, any arrangement fees and any monthly charges?
- Then compare it to other borrowing options you have.
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