Personal Finance :Beware of salary overdrafts

Many banks now offer overdrafts especially to salaried employees, who receive their monthly salary through them. An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero.

Many banks now offer overdrafts especially to salaried employees, who receive their monthly salary through them. An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero.

In this situation the account is said to be “overdrawn”. The bank normally recommends that you get half of the salary which is then deducted from your next salary payment and a little fee is charged on that overdraft taken.

Overdrafts are designed to offer flexible borrowing to meet short-term needs rather than moving around from friends asking for credit. They are also good because they are quick and fast and do not put you into the trouble of thinking when to pay back.

Overdrafts should not be mistaken to personal loans as these involve larger amounts and normally take a repayment period of between one and five years with interest.

However, despite an overdraft being an option to take to solve those pressing needs, it may likely be financially constraining since it hinders the ability to face financial challenges and schedule them according to your expected cash flow.

This is because overdrafts do not require you to meet any requirements that are hectic.  You just have to have an account in that bank and your salary going through it.

Moreover, it affects your budget for another month, as it may force you to take continuous overdrafts to meet each month’s needs thus affecting your savings.

Again, overdrafts tend to limit the way you utilise your account.  For example, when you get money less than the overdraft you took, you would not deposit it on that account since it will immediately be converted into payment for the overdraft forcing you to keep it in your pockets which becomes tempting.

Much as it is good to have that overdraft as we mentioned earlier, make sure that the financial problems propelling you to get that overdraft are unavoidable; otherwise if they can be forwarded to the next month, never bother picking that overdraft.

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