Don't let the red fill you with dread

Overhaul your overdraft for the overspend.
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Buying a car or a computer? Planning a holiday or a new kitchen? Reconnecting with your inner self via a bout of concentrated retail therapy? However justifiable the extravagance, any large additional expense can wreak havoc on your regular bank balance, and there's a good chance you'll have to borrow to cover the cost. Do a bit of homework, as there are various options - and some could cost considerably more than others. Your choice depends on the size of your planned borrowings, and how long you'll need to clear them.

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Buying a car or a computer? Planning a holiday or a new kitchen? Reconnecting with your inner self via a bout of concentrated retail therapy? However justifiable the extravagance, any large additional expense can wreak havoc on your regular bank balance, and there's a good chance you'll have to borrow to cover the cost. Do a bit of homework, as there are various options - and some could cost considerably more than others. Your choice depends on the size of your planned borrowings, and how long you'll need to clear them.

An overdraft on the current account is the norm. But there are big variations in bank interest rates, and if you are an habitual overspender, it's worth choosing a bank with a competitive overdraft rate.

First Direct's Premier cheque account charges an alluring 8.9 per cent, though there's a £5 monthly fee on top. Smile, the Internet bank, charges 9.9 per cent without additional fees (plus a £500 buffer). Otherwise, you're looking at over 10 per cent - up to 18.8 per cent (plus fees) from Lloyds TSB and Yorkshire Bank. In real terms, if you borrowed £1000 with First Direct, you'd be paying £7.10 plus £5 fee per month; the same overdraft from Lloyds TSB would cost £14.50, plus a £5 fee.

That's the authorised fee; unauthorised voyages into the red are much costlier. Interest is charged at around double the rate of a pre-arranged loan. On top of crippling interest, you'll probably pay a monthly penalty, usually £10-£25, which may rise if the overdraft persists.

Finally, you'll be charged £25-£30 for the return of each unpaid cheque. Some banks do allow for short-term overspends free of interest. The Co-op Bank, for instance, provides up to £250 interest-free for three days, if you're paying in at least £750 per month, while Bank of Scotland makes £100 available without restrictions.

You could run your borrowing facility considerably cheaper on plastic. Fierce competition among credit card providers has led to some very competitive standard rates. Egg, another Internet bank, is charging just 9.9 per cent -without additional fees. Better still, it has a 45-day interest-free period, which might give you long enough to regroup your finances and pay off the debt. Other good rate deals come from Northern Rock and Capital One bank (11.9 per cent). There are also some exceptionally low introductory rates - you could even move around as the periods expire.

Best value of all comes from Capital One's Premier Visa card, which charges APR of just 3.9 per cent with a 54 day interest-free period, for the first six months. Tesco's introductory rate of 4.9 per cent runs until 1 January 2001.

Another interesting possibility for occasional overspenders is offered by the mortgage-cum-current accounts, which combine your current account and mortgage debt into one huge overdraft facility at mortgage rates.

VirginOne, which blazed this trail, charges between 7.1 per cent and 7.55 per cent. So, subsequent borrowings on your account are charged at the same competitive rate.

Which option suits you best? Marginal overspenders should look for temporary interest-free overdraft facilities from their bank, and make use of a cheap credit card to ease the occasional pressure on their bank account.

Borrowers with a specific medium-sized expense in mind could arrange an overdraft, but it will be cheaper to use the cheapest credit card you can find and pay it off monthly.

Financial control freaks should look at the combined mortgage/current account option, which allow great flexibility to spend but demand an element of self-discipline.

There is also the option of personal loans. Over seven years, the most competitive lenders (Tesco, Alliance & Leicester, Lombard Direct) charge an APR of 9-10 per cent on £15,000. But personal loans are restrictive and inflexible.

All figures supplied by MoneyFacts

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