Overdrafts as Longterm borrowing

midnitegremlin

Just a topic for discussion. When did people (banks, the world in general) start thinking of using overdrafts as a form of long term borrowing. It does seem the case that people have "max out" overdrafts, and essentially treat them as another form of long term (very expensive) credit.

When I was young, I seem to remember overdrafts being more like short term, ie, you went into your overdraft sometimes, and then when you got paid it was cleared. That sort of thing . But the assumption/habit being that it was a short term thing.

matchboxfull

I think it probably happens slowly over time for people. A tenner here, fifty quid there.

It's also very easy to spend out of an overdraft because it acts just like cash in a current account. You don't even have to actively do anything, it could just be an accumulation of direct debits that you can't really afford.

Additionally, it's quite easy to kid yourself into thinking that the overdraft is cheap or free. It's easy to gloss over the cost of it, which is quite often difficult to work out.

One thing that surprises me is the sheer size of overdrafts these days. It's rare that a person would legitimately need to borrow, say, £2000 for a few days as a one-off. The banks know that people are effectively living in their overdrafts (having basically borrowed it once and never actually paid it back). It's a massive money-maker for banks, which is why the average overdraft is so huge.

Final point - most people don't know that their overdraft is repayable on demand. It's in the small-print, if course, but most people don't read it. They don't realise that they might have to find that money at any given point (or face a AP on their credit file). Nor do they know that their being in the OD affects their credit file in itself. As with most of these financial things, more education is needed.

leebo87

For me it was whilst at University. Never looked at it sensibly - i.e. not my money, and will end up paying more, so by the end of my course I was regularly nearing the limit eagerly anticipating the next student loan payout to come in.

allybee101

I limited my overdraft to £500 whilst at uni (early 2000s), despite Nitwest offering a progressive OD limit over three years to £2000.
I had that OD limit for about 6 more years then when I moved to a new job and was trying to keep up with the Jones my OD gradually increased to £3000 :eek:

I never actually requested the increases, Nitwest just kept automatically applying them to my account. The highest limit they ever gave me was £3400. I had tried to reduce the limit occasionally but never succeeded. Thankfully I came to my senses in 2013 and started to reduce it down seriously.
It took me nearly a year (helped by a temporary assignment at work which boosted my income for 5 months). I immediately reduced the limit to £3000 so i wasnt tempted by the "available balance". I moved a lump sum each month to a separate account, when I had several hundred pounds saved in would transfer it back into my current account and immediately reduce the OD limit by the same amount. I didn't have the willpower to not spend it if it had stayed in the current account.
The moment when my account first went completely back into the black was fabulous!
I've been OD free for 18 months and it feels great. I moved banks and I don't have any OD facility now.
It makes me so angry to think of the money I wasted on OD charges, and it is frightening how easily banks will arrange an OD and let them spiral.

matchboxfull

Yes, Natwest are terrible for that 'available balance' thing. It really winds me up.

Nationwide, in contrast, virtually hide the overdraft. it's not added to the available balance, and you have to hunt around to find out how much it actually is.

sourcrates

Banks, are in business for one thing, and one thing only, and that's to make money.
Yes they have to provide "other services" to "help" people, they have to have a "public face", they come out with terms such as "the listening bank" and other such guff.

But in the end, unless you have some kind of borrowing from them, you don't make them any cash, they want you to have a £5000 overdraught, because they know you cant resist that Jamaican holiday, or that new dining table.

They want you to have that £10,000 loan for a new car, or to take out a mortgage with them, the overdraught is usually the tip of the iceberg, once hooked, its loans, credit cards, mortgages, the full Monty, a customer for life.

That's what the banks want, no, need, they need you to be in debt to them, otherwise they have no business.
A wonderful example of capitalism in action.

gettingtheresometime

I started to use my od on a robbing Peter to pay Paul basis deluding myself that I was in control of my various debts.

Having cleared nearly £1k worth of od debt I know I should really close one of the accounts but there's a little voice that is saying what if you need cash urgently.

I don't use these accounts on a day to day basis so I can't accidentally use the od if that makes sense.

Tyrone_Black

I lived in my overdraft in my early 20s but now would always chose credit card debt over that. You know where you stand with credit cards. Overdrafts can appear and disappear at the whim of the bank and swallow up your salary. Worse still, I've seen people have their benefits grabbed when the banks know full well they're not supposed to do that.

midnitegremlin

matchboxfull wrote: »

Final point - most people don't know that their overdraft is repayable on demand. .

I get the impression some people don't even let it sink it that it's debt!! IE, they have £2000 overdraft or whatever, and it's at £2000, they don't realise that they will need to pay it back someday. I guess, without any form of minimum payment, they technically don't.

matchboxfull

midnitegremlin wrote: »

I get the impression some people don't even let it sink it that it's debt!! IE, they have £2000 overdraft or whatever, and it's at £2000, they don't realise that they will need to pay it back someday. I guess, without any form of minimum payment, they technically don't.

Yes, and also if you're 'paying it back' every month you can kid yourself into thinking you don't owe it.

Often on this board people list their debts and then later add the overdraft. It's easy to miss that it's a debt. I've done it myself.

chuckley

matchboxfull wrote: »

Yes, Natwest are terrible for that 'available balance' thing. It really winds me up.

Nationwide, in contrast, virtually hide the overdraft. it's not added to the available balance, and you have to hunt around to find out how much it actually is.

I was very happy when I saw this. my old abbey was just like how natwest are.