Overdraft: what it is, how it works, interest and more!

Overdraft: what it is, how it works, interest and more!

Table of Contents

The overdraft is a credit pre-approved by banking institutions, based on the financial profile of each client, which serves as extra income in a time of need or to pay expenses and financial unforeseen circumstances..

You have probably heard of overdraft, whether in a conversation with your bank account manager, family or friends. But you know how overdraft works?

That “invisible” money that is available for withdrawal, but in the end it is a true trap! Therefore, it is important to know how this resource impacts financial control.

In order to resolve these and other doubts, in this content we will explain which is, how overdraft works and why people fear using it.

What is overdraft?

THE overdraft is nothing more than a kind of pre-approved credit financial institutions and is based on the profile of each client.

Instead of being negative with the bank, the overdraft makes the customer get extra income at an opportune time and pay off your expenses and financial unforeseen events.

How does overdraft work?

The overdraft works like a automatic loan, when the bank account is cleared so that it does not go into the red.

However, what few know is that overdraft interest are very high and over time they can push the account holder to even bigger debts and somewhat complicated to resolve.

Because it is so practical and easy, this type of loan is censored and treated as a financial villain for some people.

After all, this solution is 100% available and, therefore, users almost always forget about their high rates that increase day after day, while overdraft is used.

At first glance, overdraft can seem convenient and comfortable. However, after its use, it can have serious and not as beneficial consequences as it appeared. In other words: not everything that glitters is gold.

It is necessary a financial planning style=”font-weight: 400;”> so that you don't fall into that “trap”. Look how overdraft works:

  • When to reset the balance in your checking account, the customer can request the desired amount to fill this deficit, through ATMs or the bank's app;
  • It is possible to register so that, if the account obtains a balance of less than zero, the loan will be automatically credited;
  • The overdraft amount can be used for both withdrawals and payments payment slips, miscellaneous purchases or transfers.

What should be remembered: from the moment you use the overdraft, interest and fees start to run on the borrowed amount. The sums are changed daily, including on weekends and holidays, making life difficult for applicants.

Now that you understand what overdraft is and how it works, let's understand why interest rates are so high?

Why does overdraft have high interest rates?

It is simple to answer this question: given the ease and practicality of obtaining the overdraft, financial institutions do not ask for many guarantees to grant it.

As a guarantee, interest is added day after day so that the account holder pays for the loan and the bank is not at a loss.

With this, account holders can obtain a extra income quickly, without the requested bureaucracies on a conventional loan. All of this then goes on, without appraisals, warranties or contracts that stipulate conditions and deadlines.

However, the lack of planning to settle the debt may result in new unforeseen expenses and, in some cases, management stress at work and depression.

How to avoid using overdraft?

Avoiding the use of overdraft can be a difficult task, especially for those who do not plan financially.

However, it is possible to observe the best alternatives and learn to make more assertive decisions so that, over time, the situation is favorable and there is no need for external interference, even if banking

For you to apply this improvement in your financial life, we highlight below some relevant tips on the subject. Check out!

1. Analyze your expenses and compare them with your monthly income

Write down what you usually spend in a month on paper or a spreadsheet. Both fixed and variable accounts.

This helps to calculate the average cost of your expenses. Then, compare that amount with the sum total of the amounts that fall into your account monthly.

This is an important exercise for you to avoid impulse purchases, unnecessary or forcing you to seek a quick income, such as overdraft.

2. Build your financial reserve

Based on the tip above, dedicate a portion of your monthly income to eventual needs and unforeseen circumstances.

We have no way of predicting tomorrow. And having enough time to deal with any expenses or expenses that were not within your planning can seem simpler when you have a “card up your sleeve”.

Over time, when saving and saving money becomes a habit. You acquire more financial security to achieve greater objectives, such as a period of ferias in a place you've always dreamed of, an investment in professional courses, in addition to automobiles or real estate.

Having a clear objective helps to save money and makes financial planning easier. Understand the difference between financial management and financial planning.

3. Watch out for overdraft overdraft

The overdraft can be a tricky way to solve any needs. For those who are not in the habit of checking their finances regularly, the overdraft can become a trap that is not only harmful.

Debts become a snowball and it becomes more and more difficult to “get the job done”.

4. Consider replacing debt

If the overdraft interest grow a lot, research the market for other loan options, as long as they have lower rates than the ones you already paid.

That way, the new loan will pay off the previous debt and you will have better terms and more affordable installments to deal with over the next few months. Allowing you to negotiate your pending issues and get rid of this uncomfortable situation as soon as possible.

Money with security and low cost: the UK residents does not give up

Considering all the information we had access to, we can conclude that overdraft fees can be extremely damaging to your finances.

In the long run, compromising your physical and psychological health directly interferes with your quality of life both personally and professionally.

Are you a business owner? Help your employees save money with a modern way of paying their salaries. See the following example:

Assuming that the employee has an emergency in the month and enters the overdraft, in the amount of £ 1,000. Instead of paying £ 80 in interest am, as would be charged in conventional banking institutions, with HR Consultants UKy he is entitled to the same amount by paying a single installment of £ 9. That is, a savings of almost 89%.

THE HR Consultants UKy is a HR Consultant UK tool that offers on-demand salary. Once registered in our system, your employees can withdraw their payment whenever they want in a simple, safe and instant way.

HR Consultants UKy has already brought results for several companies such as:

Learn more about HR Consultants UKy and add this benefit for your company's employees.

Now that you understand what it is, how overdraft works and because he is feared by some people, how about checking out some benefits differentiated from the corporate world?

Meet the financial welfare programs that companies can offer to the team. Good reading!



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