What are the risks of not paying the overdraft?

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What are the risks of not paying the overdraft?

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Do not pay overdraft can be one of the great UK residents financial challenges. All because, the practicality of requesting this type of credit contrasts significantly with the rates and interest of the loan.

Once this cycle has started, it can take time to reach its end. Because the original debt increases a lot, from one month to the next, and that can only increase the size (and the value) of your problem.

So it is important to know what the risks are of not paying the overdraft and also find out what are the ways to avoid falling into this big financial trap. Good reading!

What is overdraft?

Overdraft is a type of personal credit that is usually pre-approved for the bank's customer to use whenever they need it.

In the face of, for example, an emergency purchase or to settle debts that exceeded the budget, such as the credit card bill style=”font-weight: 400;”>.

And, in general, people usually rely on this “extra value” in the current account because it is very easy to use it. Which leads to the consequent high cost of such use.

Why are overdraft interest rates so high?

Practicality is undoubtedly an element that helps to make overdraft interest so high. But it is not the determining aspect.

The main focus is on the absence of guarantees that the institution requests for the approval of this credit. Unlike, for example, a personal loan or a financing, even, which request documents and a series of bureaucracies until the application is approved.

This also means that the bank has less guarantees of recovering that credit. The greater the risk for the borrower, the higher the interest.

Want an example of how harmful these fees are to your financial health? Check the variation of some of the most applied interest in loans, in the country, between the months of September and October 2021:

You can see, then, that do not pay the overdraft (as well as the revolving credit card – and any financial commitment, in fact) it is a serious risk, capable of compromising your finances in the short, medium and long term.

Let's take a quick practical example: if you use £ 500 from overdraft, your debt will increase to £ 1,064.50 in one year. This is because this type of loan has undergone a complete overhaul – it has already surpassed the average of 200% per year – to become more accessible.

To find out all about these changes, take a look, then in our article on the new overdraft rules!

What happens if I don't pay the overdraft?

Every overdraft has a limit, which is previously stipulated by the institution and can be increased (upon approval) according to the interest and request of the bank's customer.

And, as we said, the danger lies in not paying the overdraft, in spite of all this facility granted to people. And there are several risks with this default. Below, we list the main ones!

Negative name

A very common problem for millions of defaulting UK citizens it is the negativity of their respective names. This occurs when there is an outstanding debt for a certain period.

Generally, institutions look for account holders for friendly negotiation. If it extends without definition, or if the individual fails to honor with the new commitment signed, his name is negated, appearing on the lists of Serasa and SPC.

Difficulties in obtaining credit

A direct consequence of having the dirty name (or negative) is the difficulty in obtaining credit from other institutions. That includes:

  • requesting new loans;
  • financing;
  • orders for one or more credit cards.

Consequently, it is difficult to carry out your plans and ambitions and / or financial needs with such restrictions associated with your CPF number. For that reason, many companies and financial institutions do credit analyzes before granting a loan to people. If their document is negative, the chances of obtaining the loan are less.

Financial stress

This is an indirect effect of the accumulation of debts. Financial stress has the same symptoms as this popular psychological disorder, but it stems from a long and difficult financial debt.

As an immediate result, people become more impatient, worried, have difficulty concentrating and are unmotivated. Not to mention, of course, the direct problems arising from the lack of money.

It is also worth noting how much it affects a person's performance in all their circles: personal and professional.

How to escape from overdraft?

Not paying the overdraft can bring different problems, it is true, and although not using it may seem like a bigger problem, be aware that you have alternatives.

The first is financial discipline to find out exactly how much your monthly income is and how much your expenses hurt your budget.

Remembering that the math here is simple: it is important that your accounts do not exceed your income.

Furthermore, keep in mind what are the fees charged on any requested credit. This has to compose your financial planning to avoid more than expected charges.

Finally, a fundamental tip: don't trust the overdraft facility. It can be an illusory benefit that will make it difficult to pay your bills later, having to depend on this type of loan continuously to close the accounts every month.

Thus, if you need to supplement your income, evaluate loans at lower rates. Thus, your debt will be lower in the following months, making it easier to plan to pay it off.

How to get rid of debts and develop financial discipline?

Now that you know what are the risks involved in your routine when not paying the overdraft, understand what can be done to minimize the effects of your interest and even start the year without long-term debt in your life:

  • look to the bank to negotiate new conditions. This includes a new installment plan, fees and the final amount, inclusive. It is worthwhile to offer the terms according to your needs to ensure that you can comply with the new agreement signed – if the institution accepts it, although it is usually interested in receiving this money;
  • install the debt or even consider the use of seasonal benefits (like the 13th salary) to get rid of debts as soon as possible;
  • reduce overdraft limit. So, as much as it is necessary, occasionally you know how much you have and how much you can use without jeopardizing your monthly budget;
  • monitor your spending. Cut out what is superfluous and unnecessary. Focus major expenditures on necessary expenses. This will help add volume to your income and avoid using overdrafts;
  • create a financial reserve for emergencies. This consists of saving any amount, monthly, to use only in unforeseen situations.

With these tips, you won't even need to know, in practice, what happens when you don't pay the overdraft. But we have many other options to ensure that you never get in the red again and manage to balance your financial health, did you know?

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