An Overdraft Comparison

Payday loans can be a less stressful option than an overdraft (and less expensive), but some people have a hard time believing that! In this simple guide we'll tell you all about overdrafts and you can make up your own mind.

Usually we are offered overdrafts by banks when we are in a good position financially, and it gives us the opportunity to go overdrawn and to have a 'negative balance'. As such, an overdraft is a form of lending but it's different to credit cards and loans because it's more covert, a little sneakier. We go in to a negative balance and then we often have trouble getting back out of it again.

Just like with a loan or credit card interest is charged on our borrowing, but it's less obvious because we're filling in the overdraft monthly by a little but not quite to the top. If you over spend one month and go over your agreed overdraft spending limit then you can be charged a higher rate of interest or a flat fee.

Overdraft Overspending

With a Barclays account, for instance, if you go over the overdraft limit you'll go into what is now called the 'reserve fund' and be charged in the region of £25 for the pleasure, even if you only over spend by £10.

Banks don't mind you going over your overdraft limit because it's very good for their profits. With a Payday Advance loan, you'll usually be charged £25 interest on every £100 you spend, which is a lot less painful than being charged £25 for accidentally spending £10 of the 'reserve' money which the bank intentionally put there.

You may receive notices if you regularly go over your overdraft limit, these can affect your credit rating. Other banks charge similar fees to Barclays, so watch out. These rules are new and the fees for going over your overdraft used to be even worse. In 2006 the Office of Fair Trading issued a statement that the most banks could charge credit card borrowers was £12 in the UK when they exceeded their balance, but that wasn't applied to overdrafts.

What You Can Do

Get out of your overdraft or transfer to a lower interest rate now. The sooner you move the sooner you'll start to save money. Once you're out of your overdraft if you need extra money consider a Payday Advance instead of dipping back into your overdraft. That way you'll know the flat fee interest rates before you even borrow and can control your spending more effectively.

No credit is a solution to long term financial difficulties, but it can help when you're in a fix and can't wait until next payday. Overdrafts aren't everything they promise to be though and when banks are giving you a 'good deal' they'll look at ways of making money when you're most vulnerable.

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