Overdraft vs. Loan

robyn28

Hi all, I am currently £3,000 overdrawn per month, at an EAR of 19.89%. Would it be cheaper for me to take out a personal loan to pay off the overdraft then pay the max loan repayments per month? I am currently paying between £35-£40 per month in interest on my arranged overdraft.
Thanks!

opinions4u

If you can get a loan at a lower rate it will be cheaper.

If you can't, it won't.

immoral_angeluk

Will really depend on what rate of loan you could get (and if you are able to get one in the first place). That or could you do a BT to a 0% credit card? Not sure if you can BT ODs but it's worth looking into.

want-it-all

The advantage of taking out a loan over an O/D is that you can clear the O/D, get back in the black, and ideally stay there. At the same time, the loan can be taken care of with monthly payments, and ideally be put to bed once the balance is paid...

Assuming you can get a loan from a high street bank, the loan would probably work out cheaper, as not many such loans come with APR % rates above what you're already paying. Monthly payments on a 3k loan would likely be higher than £40 per month, though, but the advantage is, it would end one day, and your payments would also be clearing capital, rather than just servicing interest.

It depends how 'bothered' you are about constantly being so deep into an authorised O/D. It also depends how disciplined you are - if a loan cleared the O/D, but you went (and stayed) O/D again, you're back to square one, only with monthly loan payments to also take care of.

Paul_the_Painter

Your interest on the overdraft is probably calculated daily, so although you are £3000 overdrawn at the end of the month, if you are being paid £3000/month you are only in fact "borrowing" £1500/month.

Of course the figures will change for different pay amounts, if you are being paid £2000/month, you are "borrowing" £2000/month.

This is important if you are looking at a loan to repay the overdraft, as the APR would have to be a lot lower than the 20% you are paying.

I would suggest that the flexibility of the overdraft would be better to keep, as getting a loan and paying it off would still leave the credit in place, so you might end up dipping into it again.

Instead set a target of £150/month to pay off you overdraft, and once you achieve it, reduce your overdraft limit by £250. Leave your reduction of overdraft at least 1 month behind where you actually are, so that you leave yourself some "headroom"

Doing the above you will have paid off your overdraft within 18 months. (a bit less than 20 months as the amount of interest you are paying would decrease as you pay down the overdraft)

Another tip, is if you are sufficiently disciplined to not spend when you have money in your account, is to move as many of your direct debits as you can, so that they fall nearer the end of the month, this will reduce the amount of interest you pay dramatically. Imagine you're earning £3000/month, a your spending is £1000, and your costs (mortgage, bills etc) are £2000. If your move that £2000 to the end of the month, and spread the £1000 of spending throughout the month, even though you are still £3000 overdrawn at the end of the month, your interest will only be based on a few days at £3000, and the equivalent of £500 for the rest of the month.

Poosmate

I would be wary of taking out a loan to pay off the overdraft. I think mainly because it's a quick fix, one that (assuming you can get a loan) you don't have to try too hard and once it's set up you can easily forget about it - the payment become just abother DD from your account. Then some months down the line you've forgotten about it and there's that thing you really really need (want) so you use your card and go into your overdraft. But its ok because it's only a couple of hundred pounds (you can handle that). Then there's that whatsit and you use your card. It's ok it's only £100. The weather is rubbish and its summer, you could really do with a holiday - just a week somewhere cheap.

Before you know it, you're paying £40 interest again on a £3k overdraft and wonder what the hell happened - where did it all go?

Keep the overdraft, budget to reduce it, feel the pain and achieve the gain. I would also open a savings account and bung a tenner in there each month at least then at the end of the year you can pay £120 into your account and reduce your O/D by £120.

My o/d is the last of my debts I have to tackle. The others are under control and sorting themselves out. The o/d is just there ready to be used and I can't reduce the limit ever month as it would cost me £25 per reduction. I can only reduce it once a year at the "review" stage free of charge and wouldn't you know I was in to the limit at the "review" stage. Last year wasn't good - but this year is going to be great!

Poo

Bangton

I'm in a similar predicament and realised that actually with dedication I could pay the overdraft off within 10 months meaning it works out much cheaper than a loan would, is paid quicker and my interest payments do drop each month too...

Depends really on the length of time it would take you to pay if you didn't take out a loan.

rdchick

I have a £3000 overdraft and I went into Halifax in 2010 and got myself a £3500 loan. I never paid back the overdraft, got myself in double the debt and here I am!

My advice, get an account with no overdraft facility, transfer all DD and SO's to the new account and pay the overdraft what you can afford and jobs a goodun... I will be paying off £400 a month and it will be gone in 7.5 months roughly xxx

Calnic

From personal experience, I would say with dedication you can pay off the OD without the need for a loan. We were £3000 OD for a long, long time. The bank approached us to take out a loan to pay it off, which we did. However, at that point in our lives we hadn't looked seriously at our spending, and we ended up OD again and still with the loan to pay. Once we pulled our socks up and set a strict budget we paid it all off, but it took a steep learning curve to get there. Hindsight is a truly wonderful thing, but how we wish we'd just set the budget sooner and just paid it off ourselves.
If you can be disciplined you could pay off the OD yourself in chunks every month. The have the facility removed (or just keep a £250 buffer for emergencies).
Good luck whatever you decide. The day we paid off our OD was a better feeling than clearing the CC's! :T