Beginner's guide to: Overdrafts

What are they?

These are arrangements with your bank or building society to ease your cash flow, by allowing you to borrow cash for short-term needs through your current account. Perhaps you need to pay your gas bill tomorrow, for example, but you won't have enough money in your account to do so until your pay cheque arrives next week. Some current accounts automatically offer free "buffers" – however, these are very limited compared to what an arranged overdraft can provide.

What kinds of terms and conditions can I expect?

If your bank considers you a very reliable customer when looking at your credit history and your salary, you will probably be allowed to borrow more money for longer periods of time at lower cost; vice versa if your circumstances are less rosy. A few accounts, like Alliance & Leicester's premier account, offer interest-free overdrafts, though most charge interest, or make a flat monthly charge.

What are the downsides?

If you take out more than your authorised overdraft limit specifies, your bank may refuse to allow any more money to leave your account. Alternatively, they may charge you fixed penalty fees and high interest rates for doing so. The fees – usually between £20 and £40 – should, by law, only be enough to cover the bank's admin costs for providing these funds without prior arrangement. However, a huge legal battle is currently being waged to determine how fair the charges really are. Banks can also demand complete repayment of your overdraft without prior warning, subject to time limits.

How can I get an overdraft?

Despite the credit crunch, the availability of overdrafts does not seem to have been significantly affected. But going into the red in this kind of economic climate is not to be taken lightly. If you really need that debt, contact your bank. You can compare current accounts by the overdraft rates they charge at moneysupermarket.com.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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