Loans or overdraft
When you need access to cash it can be tricky knowing which is the best option to pick.
You could dip into your bank’s overdraft facility, for example, or pick a personal loan to provide a lump sum. But which is the best route, and how does each work?
Here we explain the pros and cons of overdrafts and loans.
An agreed overdraft can be a useful tool if you want to borrow money over the short-term, or in an emergency.
An overdraft allows you to borrow money through your bank’s current account up to a certain limit. You may find your bank automatically offers you an overdraft, or you have to request this facility.
Many loan providers will also impose a charge if you want to repay your debt early. So check the terms and conditions carefully.
An ‘authorised overdraft’ is the set limit agreed with your bank. However, you will be charged for using this, and what rate you pay depends on your bank and the type of account you have. This could be interest and/or a monthly fee, so make sure you read the terms and conditions.
There are a few banks that advertise ‘interest-free overdrafts’. But these typically apply only up to a relatively low limit, or to overdrafts on student accounts.
You risk high charges if you slip over the agreed limit. While the Office of Fair Trading (OFT) probe into these charges saw them brought down from as much as £35 to around £10, they can still mount up if you’re not careful.
For a longer-term lump sum loan you may want to consider an unsecured personal loan.
Loans from a bank or another lender that aren’t secured against a particular asset, such as your home, are known as unsecured, or personal loans. They enable you to borrow a greater sum than an overdraft facility. You will also know how much your monthly repayments for this will be and over what timeframe. So you can be secure in the knowledge that the loan will be wiped out at the end of the term. The interest rate is typically fixed for this type of loan, so you won’t face any unexpected additional costs.
The interest rates for unsecured personal loans, however, can be high if you are borrowing a small sum. Many loan providers will also impose a charge if you want to repay your debt early. So check the terms and conditions carefully. Unsecured loans are more expensive than loans that are secured against your property. The APR, or annual percentage rate, tells you the cost of a loan, so you can compare it with others on offer easily.