Personal Finance: An overdraft might turn out to be ugly

Financial institutions will be very happy and willing to give you an overdraft anytime, but has it ever crossed your mind the cost of getting this short fund-maybe you haven’t and it’s the case for many. An overdraft is a payment from a business/personal current account that exceeds the available cash balance.  The scheme enables businesses/account holders to obtain short-term funding - although in theory the amount loaned is repayable on demand by the bank.

Financial institutions will be very happy and willing to give you an overdraft anytime, but has it ever crossed your mind the cost of getting this short fund-maybe you haven’t and it’s the case for many.  

An overdraft is a payment from a business/personal current account that exceeds the available cash balance.

The scheme enables businesses/account holders to obtain short-term funding - although in theory the amount loaned is repayable on demand by the bank.

There are several important factors to consider when assessing the suitability of an overdraft, I am very sure most of us just get an overdraft because the service is available but there is an extra load that come along which we ignore or don’t put into consideration.

Things to consider

The amount borrowed should not exceed the agreed limit. The amount of the facility made available is a matter for negotiation with the bank.

Interest is charged on the amount overdrawn - at a rate that is above the Bank Base Rate.  The bank may also charge an overdraft facility fee;

Overdrafts are generally meant to cover short-term financing requirements - they are not generally meant to provide a permanent source of finance.

In some cases, depending on the size of the overdraft facility, the bank may require the individual/business to provide some security - for example by securing the overdraft against tangible fixed assets, or against personal guarantees provided by the directors.

The amount of an overdraft at any one time will depend on the cash flows of your salary or cash deposits, the timing of receipts and payments, seasonal trends in the sales and so on. 

Disadvantages

Firstly, we should take caution of the rate of interest charged on the overdraft amount used

Another thing we should be looking for is to not keep a check on our expenses, because of the availability of overdraft we may overspend when compared to our income.

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