The Pros and Cons of Using An Overdraft

Overdrafts are a popular way to borrow money quickly and easily, especially for short-term costs.

Whether you are waiting for your next paycheck or need to cover a last-minute expense, these personal finance tools are helpful if you are in a pinch. However, you should always consider the advantages and disadvantages before using your overdraft.

In this blog, you will find the pros and cons of overdrafts to help you decide whether it’s the right route for your finances. Scroll down to start learning from our overdraft guide now.

The Pros and Cons of Overdrafts

Find our unbiased list of overdraft pros and cons below.

Want to learn how to use an overdraft? Find the Polar Credit guide to overdrafts here.

Pros of Overdrafts

• Flexible — Overdrafts aren’t limited to one purpose. You can use these funds to pay bills, cover unexpected expenses and much more. There is no right way to spend the money.
• Convenient — Overdrafts provide a convenient way to access last-minute funds easily and quickly. This is ideal for time-sensitive payments where you don’t want to go through an application process to access borrowed funds.
• Cost-effective — Overdrafts are a cost-effective borrowing option for some, as the fees can be lower than short term loan interest rates. However, this depends on your individual bank and overdraft terms and conditions.
• Builds your credit score — When used responsibly, overdrafts can help you build your credit score and establish a positive credit history. This can help you in the future when applying for loans or mortgages.
• Peace of mind — Many find overdrafts provide a unique peace of mind as they are an easily accessible safety net.

Cons of Overdrafts

• High fees — Overdraft fees can be very high, if not used responsibly. This can occur if you take a long time to make repayments or exceed your limit. Paying this debt off can become very difficult when the fees add up.
• Overspending — The accessibility of an overdraft makes it tempting to overspend on non-essential expenses. This leads to some diverting from their budget, and it can cause future financial problems.
• Dependency — It’s easy to depend on an overdraft due to frequent short-term borrowing to pay off debt. This becomes a hard-to-break cycle that hampers future savings.
• Negative credit score impacts — While an overdraft can build your credit score, it can also bring it down when misused. Missed payments may appear on future credit reports and lower your ability to take out loans.
• Confusing — Without research and prior knowledge, overdrafts can be confusing. Limits and repayment schedules might be missed due to a lack of understanding.

Overdraft Alternatives

Deciding on the financial tool for you takes time and research. Before you use your overdraft, check out these personal finance alternatives.

• Credit lines
• Payday loans
• Credit cards
• Private lending

Need more overdraft alternatives or want to know more about these options? Read the complete Polar Credit guide here.

Choosing The Right Tool For You

Overdrafts allow you to access money as needed, but this convenience has several disadvantages you must note.

Always be aware of your overdraft terms and conditions before using it, and ensure you’ve researched other financial options. When in doubt, a financial advisor can help you take the next step in your personal finance journey.

Ready to develop your finances? Learn the basics of credit with Polar Credit’s online credit guides.

More Information

Credit Lines vs Overdrafts

What are credit lines used for?

Polar Credit: A New Way to Borrow

Check out our other great content in our Info Hub, with articles about the different types of credit products, money management tips and help with saving money!