Many of us have an overdraft and the interest on these can be vey high. Recently many banks and building societies have put their interest rate up on overdrafts as well and so what you are paying in interest on your overdraft could be much greater. It may therefore have got you thinking about whether you should repay it and if so, how you should repay it.
How Overdrafts Work
An overdraft is an option that is given with a current account. It is something that will allow customers to be able to borrow some money so they can spend more than they hold in the account. The amount that they are allowed will vary depending on the provider. An overdraft is charged interest only (no extra fees or charges) so you will be able to find exactly how much you will have to pay for it. The interest rates will vary a bit between providers so you can compare them. The interest will be charged daily until the overdraft is paid off. An overdraft will automatically be repaid as soon as money goes into the current account.
Should they be Repaid?
Some people hold overdrafts for a long time and some people repay them as soon as they are able so it can be hard to work out which is best. As the interest is charged daily, then you will be accumulating costs every day that you have the overdraft and so the sooner you pay it off, the sooner you can save that money. However, for a few people paying it off could be problematic. Once it is repaid, some people might see that as opportunity to spend money using it again. Therefore, they may soon get back into debt. This is because some people see an overdraft as money for them to spend, almost like they had earned it themselves, rather than thinking about it being a loan with no guarantor that they will be charged for and need to repay. If they borrow the money to pay off the overdraft, then spend the overdraft again, they will end up with two loans rather than just one. So, although it seems to make sense to repay it right away, you will need to think about whether it will actually make sense for you.
How to Find the Money
If you do decide that you are going to repay the overdraft then you will need to think about how you will do this. Obviously, you will need to get some spare money. You might decide to borrow the money or to earn more or to try to spend less to free up more money or you may decide to use a combination of these things.
- If you decide to borrow money then make sure that the cost of the loan will be less than the overdraft or else there is no point in borrowing money to repay it. Also be careful, as discussed above that it does not result in you having two loans rather than one due to you spending the overdraft again.
- If you want to earn more, then you will need to think about whether you are going to do this through working more hours in your current job or finding additional work. There are lots of opportunities such as online work, freelance work, temping, starting a business, getting a second job etc. Think about what you would like to do.
- Spending less can be easier than you might think. Comparing prices on everything you buy and switching to cheaper retailers, providers and suppliers can save a lot. Then if you cut back on things you do not need, you will find that you can make quite significant savings.