Having an overdraft can be useful if you occasionally need to bridge that gap between the end of the month and payday. But there are fees you need to be aware of before you start relying on this type of short term loan and pretty soon you can owe the bank a hefty sum of money with some equally big charges.
If you've ever wondered how to manage your overdraft, this guide is for you.
What is an overdraft and how does it work?
If your account hits zero and payday is still a few days away, most banks will let you have an overdraft. This is a short term loan that can be a great way to avoid more expensive forms of credit.
Some banks will offer you an overdraft as part of your current account. Otherwise you’ll have to arrange an overdraft with an advisor. The amount you have access to will depend on your creditworthiness.
So how does an overdraft work? That depends on whether you have an agreed or planned overdraft, or an unauthorised one.
A planned overdraft has a limit that you agree with the bank. An unauthorised overdraft means you spend more than you have in your account without arranging it with the bank first.
In both cases you’ll be charged interest and other charges, unless your bank agrees to a 0% or interest-free overdraft. It’s also worth looking out for accounts that offer a buffer zone - this means that if you go into the red by a small amount like £10 or £15 you won’t be charged
If you think you’ll need an overdraft, look for an account that has one bundled in. Always compare before you sign up for any account to get the best possible deal.
How does the interest and charges work?
Before April 2020, going overdrawn without your bank or building society’s approval would result in higher charges than on an arranged overdraft. However, since April 2020 there have been major changes to the way banks can charge fees when you go overdrawn.
That means interest on any overdraft can now only be charged at an annual interest rate. It’s now much easier to compare bank account charges - so if you want an account with an overdraft built in you can make the right choice. Most overdraft charges from building societies and banks are currently in the range of 19% to 40% and most fees will be capped at around £20 a month. Be warned that most banks are setting their rates at around the 40% mark.
For some people, however, the changes can mean that you’ll end up paying far more for your overdraft. If that’s the case get in touch with your bank and ask them how they can help with a repayment programme or if they can continue your overdraft at the current rate.
What happens if you can't pay your overdraft
Have new charges left you struggling to make ends meet? Are you asking yourself “what happens if I can’t pay my overdraft?” Stop ignoring those texts about fees and talk to your bank as soon as possible. If you’re in a vulnerable situation your bank has a duty to be fair and help you tackle the debt
The pandemic has left many of us struggling to pay our bills and your bank may offer you an overdraft to make ends meet. They should agree not to charge interest on the first £500 for three months. But if you find yourself relying on an overdraft in the long run you should speak to the bank about your debt management options.
- Ask if you can separate your overdraft debt from your day to day banking. This should help you to organise your finances and stop dipping into your overdraft.
- You could also open a separate account without an overdraft while you get the debt under control - try these simple ways to save on a tight budget.
What happens if you go over your overdraft
There’s a big difference between dipping into your buffer zone and going way over your agreed overdraft
The consequences for not keeping your overdraft under control can range from higher charges to the bank closing your account. You could also find that your payments get bounced and you’ll end up paying additional interest and fees.
You can ask for an extension to your overdraft via internet banking, the phone or by popping into your bank. But if you make a habit of going over your overdraft they’re likely to say no and you’ll be back to square one.
Going over your agreed overdraft can also impact your credit rating. Any time you borrow money it shows up on your credit score - and that includes a bank account with an overdraft. If you’re too dependent on your overdraft and regularly go over the agreed limit, traditional lenders are much less likely to accept you for a mortgage, credit card or personal loan. At Salad Money, we use Open Banking, rather than your credit score, to determine whether you’re capable of paying back a loan or not.
How to get out of or reduce an overdraft
The good news is that if you want to know how to get out of overdraft debt, you have options:
- First you could talk to your bank about your options. You could ask them to reduce your overdraft limit if you’re trying hard to pay it down. That way you won’t be tempted to keep dipping in.
- If your bank can’t or won’t help, now could be the time to start shopping around for a cheaper deal. Look out for features like 0% interest on part of your overdraft, or an interest-free introductory period.
- If you’re serious about paying down your overdraft and getting debt-free then one of the best ways to do that is to find ways to reduce your spending. That might be cutting out subscriptions you hardly use, or swapping the gym for a free online class. Quitting smoking and switching your bills are other great ways to get saving.
Alternative forms of lending
If you’re looking for an alternative to an overdraft then one option that could be right for you is a credit card. A card with a 0% period could help tide you over until payday or be used to pay off your overdraft. But beware, you’ll need to be disciplined and repay your credit card debt during the 0% window.
If you’re working in the NHS, there is another way. An affordable personal loan could help you pay down your debts at a lower rate of interest than an overdraft.
At Salad Money, we specialise in fair and affordable lending to NHS workers. We use Open Banking to assess your ability to repay your loan which means your credit score won’t be affected when you apply. And we’ll only ever use the data you approve which puts you in control every step of the way.
Our loans are repayable by direct debit unless your Trust is partnered with us in which case it’s repaid via salary deduction making money management effortless. And our Money Mind service helps you make short work of sorting out your finances. So whether you’re struggling with overdraft fees or those unexpected bills that can upend your monthly budget, apply online now and start taking control of your debt.
To find out more about a Salad Money loan contact us today.