Overdrafts are incredibly common in the UK and most adults with a bank account will probably have access to an overdraft or have been offered the opportunity to access an overdraft. While they can be great to keep your finances flowing throughout the month, there are some drawbacks which may make others forms of borrowing more suitable in your particular financial circumstances. Whilst overdrafts are a type of revolving account facility, they are still a type of borrowing so it’s important to think of them as a loan rather than quick, free cash.
An overdraft is an attachment to your normal current account. Usually you will have a pre-approved limit of anything between £50 and £1500 – it really depends on who you bank with and their creditworthiness assessment of your ability to repay any borrowed funds. You will only use your overdraft if you make a payment without having a positive balance in your account. For example, if your current balance is £5 and you make a payment of £15, you will use £10 of your overdraft.
If you don’t have an agreed overdraft you may end up using an unarranged overdraft. While they work the same way, an unarranged overdraft has not been approved by the bank and so you may be subject to additional fees or an alternative interest rate.
There are plenty of benefits to having access to an arranged overdraft, but this doesn’t mean there aren’t also some disadvantages which may make alternatives to overdrafts a better option for you.
Overdrafts are great because they allow you to manage your cashflow throughout the month without making additional applications for credit or waiting for an application to be approved. The funds are instantly accessible and so you can meet any unexpected payments or emergency bills without too much stress. Additionally, overdrafts are attached to your bank account, so you make the payments with your normal debit card or via a direct bank transfer. When you get paid on payday, your salary immediately goes towards repaying your overdraft, so you don’t have to make separate payments to repay the credit.
However, because overdrafts are not a separate credit facility, it is possible to spend your overdraft without even realising it. Making day to day purchases can quickly rack up and if you’re not careful, it is possible to end up borrowing money with no intention of doing so. As most people will have an interest rate applied to their overdraft, any borrowing often comes with additional fees which can be an unexpected blow if you have used your overdraft unintentionally.
As overdrafts are easy to access and readily available, it can be difficult to think of them as loans which makes the financial responsibility of repayment a foreign concept. Ultimately, an overdraft is not your money or money that you can spend whenever you want to; it is a credit facility and missing your repayments can adversely affect your credit file.
If you are finding that you increasingly depend on your overdraft and that meeting your credit commitments is tricky because your funds are already allocated by the time you receive your salary payment on payday, then it might be time to compare some overdraft alternatives which might help you budget better. Before applying for any of these types of lending you should make every effort to repay your overdraft first.
Overdraft alternatives include:
A short term loan is also known as a payday loan – it’s a loan that you apply for and repay on your next payday or over the next few paydays. Typically, the funds are available on the same day that your application is approved. A short term loan is a form of high cost short term credit (HCSTC) and so there is a high interest rate applied. Short term loans can give you access to cash fast but you will have to make your repayment with accrued interest which can make this type of borrowing expensive if used repeatedly.
Similar to short term loans, guarantor loans are finite loans: you make an application and if approved, you will repay the balance over a few months until the loan is repaid in full. Unlike short term loans however, you will need a guarantor – this is usually any friend or family member – who agrees to repay your debt on your behalf if you fail to keep up with your repayments. Guarantor loans are an alternative loan option if you are frequently rejected because you have a poor credit history.
Credit cards are one of the most popular forms of borrowing. Similar to an overdraft, a credit card is a running account facility. This means you can borrow continually until either you or the bank ends the agreement and as long as you make your repayments on time. Credit cards allow you to make a minimum payment each month if you are unable to repay the balance in full. However, it is important to note that only paying your minimum payment will take you longer to repay your balance.
Private lending is an informal type of borrowing. This is, in more simple terms, borrowing from friends or family. Usually, you won’t be charged an interest rate and there is no credit agreement in place, however it’s a good idea to have some form of written consent (even if it’s just an exchange of text messages) to show that you agree to repay the money back to your friend/family. While quick and usually cheaper than other forms of borrowing, it can be difficult to ask your friends for financial aid – especially if you know they may be struggling themselves.
A credit line is a relatively new product but is most comparable to a credit card. You can borrow money up to your credit limit and you can make a minimum payment if you are unable to repay your balance in full. However, when you withdraw from your credit line, the funds are deposited straight into your bank account and you can spend the money through your normal debit card or via bank transfer – in this way, they are very similar to an overdraft.
Polar Credit offers a credit line to help you meet your monthly cashflow needs while still giving you the flexibility to borrow as and when you need to without committing yourself to huge, unaffordable repayments. While it is ideal to repay your borrowing in full each month, we understand that not everything always goes according to plan and you may need to make a smaller repayment on occasion, hence as long as you make your minimum payment on time and in full, your account will stay up to date and you will be able to continue accessing the funds you need.
If your application is approved, you can withdraw funds up to your agreed credit limit and the money will show in your bank account within a few minutes. Over time, we will review your account to see if you are eligible for a credit limit increase and you can request a credit limit increase or decrease to suit your circumstances. As we are committed to providing a sustainable credit product for our loyal customers, we will also reduce your interest rate every six months after your first anniversary with us, so that responsible borrowing is rewarded with cheaper interest rates.
Although we do perform affordability and creditworthiness checks before approving your application, it’s important – as with any loan or credit product – that you only apply for a credit facility if you really need it. If you already have an overdraft in place, try to repay this first or at least contact your creditor to find out if there is a more affordable way forward.
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