Many people have an overdraft facility on their current account. It allows you to be able to draw out more money than you actually have and so essentially is a form of loan. You can normally negotiate with your bank to ask for a certain size of overdraft. Some people will not be allowed to have one due to their credit record not being very good, but many people will be able to have one.
There are essentially two types of overdraft an authorised overdraft as described above where a person negotiates with a bank to choose how much they wish to borrow and an unauthorised overdraft. An unauthorised overdraft is where money is borrowed without permission of the bank. The authorised one is expensive but is very much cheaper than an unauthorised one. The way that the lender charges will vary from place to place and if you are considering using an overdraft then it is really important that you are aware of the charges.
Before you consider using an overdraft it is worth checking to make sure that there are not better ways to get the money. You may have some savings that you can use or you may have another form of borrowing available. It is worth noting that an unauthorised overdraft can be one of the most expensive ways to borrow money and so if you are considering one then it could be worth looking to see whether there are cheaper ways to borrow money as an alternative. It is also wise to make sure that you keep a close eye on the balance on your account to make sure that you do not accidently go overdrawn as if you have savings you could use to pay it off, you could kick yourself if you do not realise and get needlessly charged.
Thinking about when to use an overdraft is crucial. You need to carefully consider whether it is the right thing to do before you do it. This means that you need to be aware of how much money you have in your account and how close you are to spending so much that you go overdrawn. You need to consider the cost of being overdrawn and whether it is worth paying those charges that you will get for being overdrawn for the item that you have chosen to buy.
Timing is really important with an overdraft. You will often get charged per day that you are overdrawn, particularly with an unauthorised overdraft and so you need to think about how close you are to being able to pay it off. An overdraft gets paid when you deposit some money in the account. This means that it is most likely to be when you get paid. If it is a long time before payday, then the overdraft will cost you a lot of money compared to if it is just a small amount of time until you get paid.
However, it is also worth thinking beyond this. You do not want to be in a situation where you keep getting overdrawn. If you pay it off when you get paid and then find that you run out of money as a result then you could get overdrawn again. You could find that you go less and less time between becoming overdrawn and it could lead to the situation where you do not get paid enough to pay of f the overdraft in full. This means that you need to be extremely careful. If you do borrow money this way you need to be really confident that you will be able to pay it off and have enough money left to be able to cover the rest of your expenses until you next get paid.
You therefore need to be extremely confident that you will be able to repay what you owe and still have money left. You also are best timing when you borrow money so that you do not owe money for too long. It could be well worth looking for cheaper ways to borrow money if you can, as you could save a lot due to the fact that overdrafts can be extremely expensive.