The real cost of having overdrafts

Here are points to consider if you’re in a financial situation that might cause overdrafts.

08:25 29 September 2013

Overdrafts might make some people nervous but there are two different types of overdrafts. Depending on the situation both could come in handy during a financial emergency, but there is one type of overdraft that is better for your finances than others. It is typically referred to as an authorised overdraft. 

 

Here are a few things to know about overdrafts.

 

Authorised overdrafts: 

 

• These are treated like bank loans. The amount you need is given and then your deposits work to repay the loan, or you may need to specify payments to the bank.

 

• There is typically an interest rate charged while you are paying back the amount that was overdrawn. The interest is usually preferable to a payday loan but might be higher than some other alternatives.

 

• There is no negative action on your credit rating, or relationship with the bank. 

 

Unauthorised overdrafts: 

 

• Only the amount that you overspent is given rather than a preset loan amount from the bank.

 

• Some banks charge fees per each item that comes in to be paid when you don’t have enough money in the account.

 

• There can be daily charges assessed if it takes a little while for you to obtain the funds to repay the bank and bring your account current.

 

• You may be charged a monthly fee if you cause an unauthorised overdraft at any point during the month.

 

• Some banks may also charge you an interest rate either in place of, or in addition to, the regular fees per each item presented to the bank when you have no funds. 

 

If you think you might be in need of an overdraft talk with your bank to find out how it would be handled.