It is always worth comparing different methods of borrowing when you are looking for a loan. This is because they can vary quite a bit and you will need to be sure that you pick the method which works best for you. You need to think about how much you need to borrow, how soon you need the money, how long you want it for, what you can afford to repay, how much you are prepared to pay for the loan and whether there are any features you are looking for in the lenders. This is a lot to think about and it is important to get it right because it will determine whether you get good value for money form the loan and whether you have appositive borrowing experience. So it is really important to know what the main features are and then you will be able to decide whether it is a good option for you.
How Much Can you Borrow?
With an overdraft the amount you can borrow is flexible to some extent. You will be given a credit limit and you will be able to borrow up to the amount. The specific amount that you will be able to borrow will depend on what the bank decides to give you. Some will give all customers a similar amount and some will base it on your credit rating. You will have to look at different ones to find out how much you will be able to get. Normally the amount will not be more than a few thousand pounds though and it may very well be less. This means that you may need to look elsewhere if you need to borrow a significant chunk of money.
How Much Does it Cost?
The cost of an overdraft can vary. Most lenders tend to charge between 35% and 40% though and they are no longer allowed to charge additional fees or charges which means that you will be able to compare them easily to see which is cheapest. This rate is quite high compared to some credit cards and personal loans although it is less than short term loans, so you will need to think about whether you want to pay this or whether you are going to look for a cheaper option.
How is it Repaid?
Unlike most loans, there is not a specific repayment schedule for overdrafts. The overdraft is just repaid when money is paid into your current account. This means that you will be able to repay it as you can afford to. Although this has advantages as there is no pressure to find the money by a certain date, it also means that the overdraft could hang around for a while and you will be charged interest for every day that you have it.
Who are the Lenders?
With an overdraft the lender will be the bank that you hold your current account with. This means that you will know who they are and are likely to trust them and be happy with using them or else it is unlikely you would have an account with them. You may be choosing a new bank though, but most banks are well known. With some loans, the lenders are less well-known and perhaps do not have high street branches and are newer and less familiar to us. You will need to decide if you are happy with using these sorts of lenders or whether you would rather go with one that you know.
So, you can see that there are quite a few differences between overdrafts and other ways to borrow. You will need to think about whether these differences are important to you and how they will influence how useful this type of loan will be for you.