Most people that have a current account also have an overdraft facility. This could be an arranged overdraft where they can borrow money up to a certain amount or they may be able to draw more money out than they have in the account using an unauthorised overdraft. Some people use these facilities on a monthly basis and others use them less often, with some not ever using it.
The useful thing about an overdraft is that it will always be there so if you run out of money you can get a bit extra. It is paid off quickly as when money comes into the account, it pays off the overdraft immediately. This means that you do not even have to worry about a transfer or anything like that as the money will go straight into paying it off. Often an overdraft is automatically set up by the bank as well, which means that you can use it easily without having to ask permission. This means that you get instant access to the money and it can be very convenient.
However, an overdraft can be a really expensive way to borrow money. The rate varies between lenders but it is often a lot higher than other ways to borrow money, so it is worth being careful and checking. If you use an authorised overdraft then you will have a certain rate, but if you borrow more money than the bank has agreed to let you have you will be having an unauthorised overdraft. These can be extremely expensive. Not only will there be interest charged but there will be fees as well and these can add up really quickly. It is worth making sure that you are aware of what you will be charged, both for the authorised and the unauthorised overdraft. An unauthorised overdraft can have a daily fee.
An overdraft should really be used for times when you need a little bit of extra money that you will be able to repay soon. A credit card is a better way to borrow if you pay back the money when it is due, as you will not be charged interest. However, if you do not have a credit card then this may be the only option for you to borrow money. If you think that you will need to borrow more than you have authorised then try to negotiate with the bank to get a bigger overdraft as this could save you a significant amount of money in fees and charges.
An overdraft will charge you daily. This means that you do not want to use it a long time before you are going to pay it off as the cost will be really high. Therefore the best time to use it would be just before you are getting some money in. It can help you to get through to your next pay day, but it is expensive even for a few days and so should be used with caution. Use for emergencies only is probably the best way to approach them. They can be convenient but because they are so expensive, it is better to only use them when you really need to.
If an overdraft is something that you think you will use a lot, then it can be worth comparing current accounts to see whether you will be better off switching to a different one. There will be big differences in the interest charged and the fees between different banks and building societies and so you may be able to benefit a lot by choosing an alternative one. Obviously those fees can change from time to time and so it is worth comparing on a regular basis to make sure that you have got the best deal.
So if you are going to use an overdraft only use it for emergencies. It is expensive so shop around and try to find an account with one that is cheap and use it for the least amount of days possible. Try to find alternatives if you can so that you can save money. If you can use a credit card, for example, it could be a cheaper alternative. You might be able to use savings that you have or just wait a few days until you get paid. It is easy to get overdrawn without noticing at times and this can be costly, particularly if you are buying things that you could have waited for. Therefore , it is always wise to keep an eye on what your current account balance is so that you can ensure that you only go overdrawn if you intend to, rather than by mistake. It is usually possible to budget or wait when it comes to spending and so if you are more aware of what money you have available, then you will be able to act accordingly.