Is Taking An Overdraft Facility A Bad Idea?

By Toby Tunwase

As the economy of nations expands, the opportunities to lend, borrow and invest money also increases. An overdraft facility is one of the many options that allow people to borrow money from banks. They are quite different from personal loans and credit card loans but not as popular as those other loans.

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Are you wondering whether to take an overdraft facility or not? Let’s detail how overdrafts work and let you decide whether they are bad borrowing options for you.

Overdrafts are only available to current account holders. It allows you to take a limited amount of money from your account even if you don’t have such an amount. Most times, you can withdraw from your empty or low account without informing your bank.

Overdrafts can be authorized when you request it from your bank. It can also be unauthorized if you do not request it from the bank. With that said, an overdraft can be a bad idea, depending on how you use it.

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An overdraft is a debt you owe your bank. Banks charge between 19%-40% as the interest rate on overdrafts.  Taking unauthorized overdrafts or going beyond your authorized overdraft can affect your credit rating. Overdrafts are also generally more expensive than personal and credit card loans.

Besides, your overdrafts are secured against your business assets, and the bank may ask you to repay at any time if you run into financial difficulty. You are only advised to go for overdrafts if you intend to use them for emergency or short-term purposes.   Otherwise, you may be setting yourself up for a tough financial struggle.