Overdrafts as Longterm borrowing

MERFE

matchboxfull wrote: »

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.

Totally did this, well we were out the overdraft then January was rough and I was ignoring how rough and used it up again, so easy to do. Ours is only £500 max now, was £1500 so we have managed to get it down. This month if my calculations are accurate we will only be in it £200 then hopefully next month cancelled.

ispookie666

I do have 3k as available overdraft from Santander and use it once every few months, even though the interest is £1/day irrespective of amount upto 3K - it has been invaluable.

jamesd

midnitegremlin wrote: »

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. ... treat them as another form of long term (very expensive) credit.

I have something close to £10k of overdraft facility that has an annual interest rate of approximately 4% if I use it all. It's a cheap form of borrowing though I do often have cheaper options for longer periods than weeks.

midnitegremlin wrote: »

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.

The catch is that using it continuously will be taken as a sign of financial mismanagement so I don't use it long term, cheap though it is compared to investments making taxable 12%. It really is intended to be for only short term use.

In my case the reason I asked for an increase from 1k was short term use between buying and selling investments so I didn't have to wait for the sales to complete before doing the buying.

midnitegremlin wrote: »

It does seem the case that people have "max out" overdrafts, and essentially treat them as another form of long term (very expensive) credit.

It's been that way for as long as I remember. Some people just aren't that good with money. Others of more limited means get caught out by adverse circumstances and have difficulty recovering. Others lack mental capacity, either short or long term, and need help to deal with that.

Puddylove

I've never understood the overdraft idea - and so don't have the facility on my account.
I've never ever gone into the red, as I track and manage my account balance.
Saves a lot of hassle/fees.

thegrind

Overdrafts are really a tool designed to smooth out your finances and prevent short term cashflow problems affecting your payments to creditors.

Say for example you change jobs and have to wait 6 weeks for the next pay day or a cheque you banked has bounced for whatever reason and you have a payment that cheque was supposed to cover. It helps you maintain cashflow.

Overdrafts are not a good way of borrowing.

A little story:

About a year ago I had a 5k overdraft limit with my bank, unfortunately I was made redundant last year and received a reasonable redundancy payment but didn't have a salary paid into my account for about 3 months as didnt have a job for a few months.
Within a week of not receiving my wages on my usual date the next month into my account I had the dreaded letter from the bank saying my OD was being cut to £1k in 30 days and needed to be brought in line.
Luckily I had the money to clear it off as I had savings and cancelled the OD completely to prove a point.
The clause in an OD is that they can be withdrawn on request. The proverbial umbrella when its not needed.

The moral is don't borrow with an Overdraft use it only for cashflow hiccups inline with your budget.

greensalad

I slipped into mine at university when I didn't have enough cash, even after job was done, to pay rent. It just became a way to pay rent. Then I opened a second one which also got used.

I've only just got out of the smaller one. Hoping to get out of my Natwest one soon.

It's just a case of easy cash. If I hadn't had that cash, I'd have had to go elsewhere which would have probably been family.

I'm surprised I've managed to keep hold of my Natwest overdraft for so long, I don't pay anything into that account and have never received the dreaded letter. I know I have to save until it's completely paid off before calling them because I don't want to activate the trip wire and lose the whole thing!

JHiggins91

Seems to be a common theme but I also got my overdraft when I was in uni.

It was to start with interest free so seemed like an easy road to go down at the time - hindsight is great

It was about 300 to start with now it sits at 2000 however I have been putting some away elsewhere to help reduce this.

unimaginative_user_name

I think a lot of the nation's problems with debt started when people began to have to borrow to go to university. It made it normal to be in debt in your early twenties and while it was what Martin might call good debt as in theory a university degree was a good investment leading to potentially great earnings later in life there was not enough education about the dangers of other kinds of debt. This is just a pet theory of mine and I know that debt has been around a lot longer than student loans. I just know my generation was the last to get a free/cheap university education and we were very fortunate.

nkkingston

I know a lot of people at uni who deliberately maxed out their interest free overdrafts, put the money in a high interest savings account along with their student loans, and lived off 0% credit cards. It was all very baby's first stoozing adventure, and was tacitly encouraged by the banks because it meant you opened more products with them. Of course, when you're moving house every year or more often, you don't tend to remember to update your bank every time, and when that overdraft suddenly switched to interest the fines would mount up at high speed before you even realised.

14CJP

:(For some time Ihave been asking Nationwide BS to introduce current account offset. They won't. I have two current flex accounts, if one strays into overdraft and the other has a credit balance, nationwide effectively charge me to borrow my own money.

Why can they not consolidate (offset) balances for charging purposes? It is only a simple bit of software and they do claim to put customers first!