When you open a current account, there may be additional features that you have the option of tacking onto your product. One such feature is overdraft facility, which protects you from overdrawing your account when you write a check use your debit card. This feature has been offered to businesses to help them expand their working capital. However, the popularity of overdraft has also trickled to personal accounts, allowing individuals the flexibility of an additional money source in months where funds might become tight.
Similar to Credit Cards?
Overdraft facility is very similar to credit cards in that you use as much money as you need, when you need it. You can then pay your balance back in full or in minimum monthly payments, with a payment structure that is explained when you are approved for your overdraft facility.
In some cases, banks might charge a fee for using the overdraft facility. There will also be interest charged on the outstanding balance, which may be significantly higher than the rate of a standard personal loan.
Overdraft facility is also similar to credit cards in the way that it is issued. While banks only give overdraft to customers who open current accounts, the amount of the overdraft will be dependent on the customer’s income level and credit history, just like credit cards.
The bank or building society may also evaluate a customer’s history with the institution when issuing overdraft facility. In some cases, a bank may issue a small overdraft and then consider raising the limit in the future when the customer has a proven track record of responsible use and timely payments.
Benefits of Overdraft Facility
There are a number of benefits of overdraft facility that should be considered when one is opening a current account that includes this feature. These include:
* Flexibility – Funds are available when you need them, in the precise amount you want.
* Protection – Overdraft facility can ensure your bills are covered in months when money is tight.
* Availability – Overdraft facility may be easier to get than other loans because the bank has flexibility in the amount they will approve.
* Cost – Overdraft only costs you money when you use it, so you control the fees involved with the service.
* Repayment – Pay the balance in minimum monthly payment or in full at any time without overpayment penalties.
The benefits of overdraft facility are enjoyed as long as the overdraft is used carefully and responsibly by the account holder. However, like other types of debt, overdraft facility can be misused and put the person into debt difficulty.
Drawbacks of Overdraft Facility
While there are many benefits to overdraft facility, there are some potential drawbacks as well, including:
* Expense – The fees and interest rate for using overdraft facility can be high.
* Misuse – Some account holders may run up an overdraft balance too high to be easily repaid.
Whether overdraft facility is right for you is a matter of personal choice. By learning the pros and cons of overdraft, you can make a thoughtful decision as to whether this is a good feature to add to your current account.
