What is an overdraft and why would I want one?

EltonJohnFan

Hi all,

I was recently approached by a member of staff whilst in my bank depositing a cheque and the woman asked me if I'd like to discuss an overdraft. To tell you the truth I don't have the faintest idea what it is because I've never dealt with debt and always budgeted and lived within my means. Can you tell me a little bit more about them? how do they work? am I right in saying that say I had a balance of £5,000 and an overdraft of perhaps £1,500 then I'd have a total account balance of £6,500 or have I got this all wrong? appreciate your help.

pcombo

Yea you would have £6500, Just a loan basically from the bank, If you dont need one theres no point taken it as you would need to pay interest etc. And if you ever go over you get bank charges.

EltonJohnFan

pcombo wrote: »

Yea you would have £6500, Just a loan basically from the bank, If you dont need one theres no point taken it as you would need to pay interest etc. And if you ever go over you get bank charges.

Thanks for your reply,

Does that mean that even though I wasn't using this £1,500 I would still be charged interest just for it being an available balance on my account? what if I never used it and it was just "there" so to speak?

pcombo

Erm i am not 100% sure on that one. I dont believe you would get charged interest as its not being used.

There people on here who actually work in banks who would be able to explain 100% .

opinions4u

EltonJohnFan wrote: »

Thanks for your reply,

Does that mean that even though I wasn't using this £1,500 I would still be charged interest just for it being an available balance on my account? what if I never used it and it was just "there" so to speak?

Most accounts won't charge you for having an overdraft limit that you don't use.

Some may charge you a renewal fee or similar (e.g. an annual fee for keeping the facility going). If the idea appeals, ask your bank that question.

Paul_Herring

EltonJohnFan wrote: »

am I right in saying that say I had a balance of £5,000 and an overdraft of perhaps £1,500 then I'd have a total account balance of £6,500 or have I got this all wrong? appreciate your help.

No. You have an account balance of £5,000, and in addition a very short notice (i.e. you don't have to give any) loan facility of up to £1,500.

You have an available balance - i.e. the amount you can withdraw/spend without penalty - of £6,500 however.

Just because it's 'available' doesn't, however, mean you actually have that money - the last £1,500, should you withdraw it, belongs to the bank, not you, and you will (usually) be charged interest on the amount for the duration you continue to borrow it, and it is repayable on demand (however the demand to repay usually isn't made unless the bank thinks you may have problems with credit.)

And as pointed out above, you may be asked to pay a(n annual/monthly) fee for actually having that no-notice facility, even if you don't actually use it. This will be in addition to any interest you accrue if you do use it.

Rupert_Bear

EltonJohnFan wrote: »

Hi all,

I was recently approached by a member of staff whilst in my bank depositing a cheque and the woman asked me if I'd like to discuss an overdraft. To tell you the truth I don't have the faintest idea what it is because I've never dealt with debt and always budgeted and lived within my means. Can you tell me a little bit more about them? how do they work? am I right in saying that say I had a balance of £5,000 and an overdraft of perhaps £1,500 then I'd have a total account balance of £6,500 or have I got this all wrong? appreciate your help.

If you did not understand how a overdraft worked why on earth did not knock at the bank to explain it to you. You are best staying clear as you are not financial savvy.

EltonJohnFan

Rupert_Bear wrote: »

If you did not understand how a overdraft worked why on earth did not knock at the bank to explain it to you. You are best staying clear as you are not financial savvy.

Oh, I'm definitely financially savvy, just not debt savvy as I've never had it in my life.

chexum

EltonJohnFan wrote: »

Oh, I'm definitely financially savvy, just not debt savvy as I've never had it in my life.

And someone could as well as say (and not meant derogatory) you're not financially savvy, just budget-savvy.

Just to add to the above helpful notes - overdraft can be indeed free if you don't use it, but sometimes it isn't, so you need to clarify this with your bank.

It can be good because it's reported to CRAs and other lenders can see that you're handling well another type of credit. Not debt - you're handling it well even if you're not using it all.

Also, you probably have overdraft with your bank even now, it's the unarranged/unplanned one - you'd be playing through your nose if you had to actually use it.

Lastly, all overdrafts are repayable on demand (which to me, would sound like you can, but what they say is when they demand it, you need to sort it out quickly), so you're not expected to rely on it for more than a few days each month. What they are really good for is when your incomings are outgoings are slightly skewed and don't want to break your notice savings.

E.g. your gas company just sent a bill that they want to bill you £300 more on the 27th, 2 days before you get your salary, and you'll have only £30 in the account by that time. With a planned overdraft, you may pay interest for 2 days for £270 which may be ~27p with a 19% APR overdraft.

These days it'll be hard to find a savings account that can pay 27p for £270 in 2 days, so it would only make sense to pay it, but if you cannot get that money just by breaking your savings, it may not be worth it.

davidgmmafan

If you have a healthy sum in your current account then there's probably no need to have an overdraft. As others have said it allows you to draw more than you have (hence overdraft/overdrawn), and can be a useful thing to have to handle certain unexpeted situations.

Given that you've managed perfectly well without one I see no pressing need to have one. Sounds like the bank woud approve you anyway should you need one.

BTW if you do decide to go for one find out exactly how it works. Usually its interest charged only if the balance is used. Some banks, eg Halifax, charge an exhorbitant £1 per day so steer clear if its them you bank with.