Debt advice when you’re feeling the strain of a maxed-out overdraft

Overdrafts overview

An overdraft is a credit facility of your bank account. This facility allows you to use your bank account in the normal way, but spend more than the cash you have in it, up to a set limit.

One thing that consumers often overlook with their overdraft, is that this credit is provided on terms known as ‘repayable on demand’. This means that your bank account provider could demand instant repayment of the debt at any point in time.

There are two forms of overdraft…

A pre-arrange or authorised overdraft – This is an overdraft that the bank agrees to in writing, allowing you to freely spend up to a certain limit. Authorised overdrafts are subject to interest rate fees, but there won’t be set charges unless you spend more than your overdraft allows for.

An unarranged or unauthorised overdraft – This is where the overdraft hasn’t been agreed by the bank, and your bank account goes overdrawn (or over its agreed overdraft) without ‘permission’.

In this instance, it’s highly likely that your bank will start to add charges and interest to your account, which can rapidly snowball unless your bank account is brought back into good standing.

The advantages of Overdrafts as a credit solution

  • Your overdraft can act as a convenient ‘fall back’ emergency fund when used responsibly and only relied on in certain instances.
  • As a revolving facility, an overdraft can provide peace of mind as a credit line that is always available if needs be.
  • Overdrafts are a relatively cheap solution for borrowing when compared to other forms of credit, such as a payday loan.

The disadvantages of Overdrafts as a credit solution

  • Overdrafts are very often used month in, month out, leading to a constant cycle of debt (albeit one that may be ‘manageable’). This means that you are needlessly paying interest on lending that shouldn’t be ongoing.

Worried about debts that won't go away?

Debt help tips for tackling Overdraft Debts

  • As soon as you realise that you’re about to breach your overdraft you should contact your banking provider. They may be able to extend your overdraft either temporarily or permanently.
  • Whether or not your banking provider can increase your overdraft, you’ll still need to take a step back to work out how this occurred. Are you spending more each month than you earn? Have you had a surprise bill that has hit particularly hard last week? Work out whether this could be an ongoing issue, or a one off. In the former instance you’ll need to look at:
    • Increasing your income
    • Reducing your expenditure
    • Restructuring your debts so that the repayments are more affordable
  • Should you need to restructure your debts, consider whether your banking provider could consolidate your overdraft into a loan, along with any other debts you may have. Alternatively, if your debt levels and financial situation are dire, you should start your research on debt solutions as soon as possible.
  • Bear in mind that your bank may start to ‘bounce’ cheques and direct debits if your bank account has no available funds. This will only add to the total bank charges you face repaying each month. For further details as to the monthly maximum charges of each bank check out this page from Love Money.

IVAs – A potential debt solution for overdraft debt

IVAs are a form of debt settlement that includes all your debts, and which run for either 60 or 72 months. The monthly repayments are always affordable, as are decided based upon how much you can realistically afford after living expenses.

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