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Are Overdrafts A Good Idea?

Overdrafts. a well-known phrase and a banking service that millions of people use annually, frequently without giving it a second thought. But are overdrafts a good idea?

Are Overdrafts A Good Idea? Can Be Expensive

Authorized overdrafts, ones that you and your bank have agreed upon, may sound innocent, but they can still be very expensive. For such an agreement, there will often be a fee, which may be a double-whammy, each month. A limited free overdraft may be included in the rules of some fee-paying accounts, but not all. Most will impose a daily, weekly, or monthly fee in addition to the overdraft interest. Interest rates could reach 20% EAR (a representative interest rate that shows the rate you would pay if you remained overdrawn for a year). It is usually advisable to thoroughly review the regulations governing the fees that banks may impose because they can be rather complex.

Fees

However, unauthorised overdrafts are when the expenses truly pile up and can be financially ruinous. Large costs may apply if you go above your permitted limit or into an unauthorised overdraft even briefly.

There are many different fines associated with unauthorised overdrafts.
Anything from £5 to £35 or more per month as a charge
Daily fee: can range from £1 to £2 per day or more (often up to a monthly cap), and includes:
Depending on whether your bank accepts the payment, transaction costs range from £10 to £25 for each cash withdrawal, Direct Debit or standing order, check, or card payment you make.

Experts Do Not Recommend Them

Therefore, it should come as no surprise that overdrafts may end up being more expensive than alternative borrowing options, such short-term loans. You are surely aware of the recent negative news that payday loans have experienced. A recent crackdown by the financial authorities on the sector has caused several lenders to stop making loans. A short-term loan may be less expensive than an overdraft, though. According to The Telegraph’s October 20131 report1, which cited the Which?

Which? discovered that borrowing £100 for a month from one bank cost £30 and from another £20, respectively, more than payday loan rates. With one bank, dipping £100 into an unauthorised overdraft for a month charged £100. Which? urged the Financial Conduct Authority (FCA) to outlaw charges that are too high. Although they were grateful for the well-liked probe into payday loans, it appears to me that overdraft fees routinely escape such scrutiny without good cause. Overdrafts must be included in any thorough inquiry into financial markets, debt, and lending.

Are Overdrafts A Good Idea? Banks Naturally Disagree

Banks themselves will assert the opposite. British Bankers’ Association CEO Anthony Browne claimed that overdraft fees for clients have decreased “substantially” in recent years. He claimed that fees had been reduced by $1 billion. Personally, I’m unsure about the time frame for these alleged savings. My own experience contradicts this. But there is some truth to his claim that illegal overdrafts frequently have significant fees. His assertion that such overdrafts should never be promoted has substance, as well. Unauthorized overdrafts are by definition unauthorised, therefore substantial fees are practically a given. According to Browne, clients should be more savvy and transfer accounts to ones that better suit their requirements.

However, the majority of us will never take this action. Some accounts offer financial incentives to sign up, but the bother of switching accounts and the additional administration that will be required deters us. Thus, this understandably stops many from switching between accounts or banks abruptly.

Furthermore, Santander stated to the BBC in December 2011 that “it’s misleading to equate payday loans with overdrafts on current accounts because an unauthorised overdraft charge is for unauthorised use of a current account whereas a payday loan is an accepted credit facility.”

Laziness?

According to estimates, two million of the 25 million Britons with overdrafts pay considerable monthly overdraft costs, while just 3-4% of them switch accounts annually. When attempting to calculate overdraft costs, it becomes more difficult to compare accounts. The CMA is looking into the problem and the factors that prevent individuals from switching accounts.

Cheaper Options

As a result, it would be foolish to instantly rule out the possibility of borrowing money to pay off debts rather than continuing to rely on a bank overdraft. The British population doesn’t exactly appear overly enamoured with the service their bank provides. Due to the financial crisis of 2007–2008, which resulted in the disappearance and merger of many banks, experts worry that competition in the banking industry has decreased recently. As a result, any new lenders have had little impact on the market. Overdrafts are the default choice for millions of people as a result of banks’ increased caution when making loans. Many people’s long-term costs would be lower with short-term loans.

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