When we have an overdraft we often use it to help us to manage our money well through the month. This might be because we run out before the end of the month and so we use the overdraft to help us to buy what we need before we get paid. Sometimes we may find that this is not enough money and so we might feel that we should negotiate a larger overdraft. But is this a wise idea?
Advantages of a
If you often borrow more money than your overdraft then you will be using what is called an unauthorised overdraft. This is where you take more money than you are allowed. All overdrafts cost money, the bank will charge you interest on it. If you use an unauthorised overdraft then you will be borrowing more than the amount that bank have agreed that you can have. When you do this, they will charge you more for it. The interest rate might be higher and there will be additional fees. You may be charged a monthly fee for the authorised overdraft but for an unauthorised overdraft it will be even more expensive. They may even charge you every day that you are overdrawn. This means that if you have a larger authorised overdraft you will avoid having these greater fees. You will still have to pay but you will not have to pay so much. It means that you will have more money available to you to spend and you will not have to worry so much about paying those expensive fees.
Disadvantages of a
If you have more money available to spend then it might be that you will be tempted to spend more money than you normally would. You might not be so careful about what you are spending the money on and therefore you could find that you will accumulate more debt than you should be. This could end up being extremely expensive as you could end up with lots of interest and fees. You might also find that you will soon use up that overdraft limit and that you will be going into your unauthorised overdraft again anyway. Even if you do not do this, having more money available to you could mean that you will be tempted to spend more money than you normally would.
How to decide
It can be tricky to decide. If you think that you will be sensible and only use the extra overdraft to save you money and for emergency purposes then it can be worth doing. However, if you feel that you will be tempted to just spend it then it could end up costing you even more money. You know how sensible you are with money and whether you will be able to resist spending the extra money or not.
Some people see an authorised overdraft as money that is theirs to spend. Just like they would with a short term loan. They do not think about the charges and fees but just think that the money is a lovely windfall for them to be able to treat themselves in things that they feel they deserve. This is a dangerous way of thinking about it because you forget about the fact that you need to repay the money at some point. You need to make sure that you are also aware of the costs of spending money like this. If you add up how much it will cost you in a year if you remain overdrawn most of the time, you will be able to see the costs better. Think about what you could buy with the money and how you are costing yourself so much by being overdrawn. It might be that you will not even be able to remember what it was that you spend the overdraft on or that you bought things you are no longer interested in.
You need to be really honest with yourself when you are making this decision. It can be a difficult thing to do as you will need to distance yourself emotionally and think about whether it is right for you or not. It could even be better to ask someone else to make the decision for you. Someone that knows you well should be able to work out whether you are likely to be making the right decision or not.
It can be a hard decision. It can seem sensible to have more money available to you. You can use it in emergencies and it will stop you going into an unauthorised overdraft which will be expensive. However, it can be there as a temptation for some people and they might think that they can have fun with the money and spend it and not think about the costs of doing that and how much they will have to pay for it in the future.