What is an overdraft?



An overdraft is a facility (usually ata bank or other financial institution) that enables an account holderto borrow up to an agreed amount and often for an agreed time. Theagreed amounts on an overdraft exceeds the deposits by the customer.

Overdrafts usually carry a severelyhigh rate of interest. Research conducted by a leading financialstates that 43% of the borrowers in UK exceeded their overdraft limitin the year 2006. This means that the Brits have paid ?895million just as the interest on the overdraft facility.

How are unsecured personal loans better funding options thanoverdrafts?

Unsecured personal loans call for amuch lower rate of interest than overdrafts. Recently, threehigh-street banks have increased their overdraft charges. This meansthat the customers using this facility will have to pay even morethan before. On the other hand, if you have a decent credit score,you may get a competitive rate of interest on unsecured loans. Boththese form of credit, overdrafts and unsecured loans don't ask forany security but there is a huge gap in between the interest chargedon each of these.

Moreover, one can procure far betteramount on unsecured personal loans. The creditlimit on overdrafts is usually restricted and not all account holdersare given this facility by the banks. As an unsecured loan, one canborrow anywhere in between ?500 to ?25,000. So, there isa greater flexibility. An overdraft usually doesn't exceed theauthorised overdraft limit. When a customer crosses this limit, he ismade subject to a penalty charge along with the normal interestcharged on his overdraft. This not only creates a negative balancefor the customer, but also adversely affects his credit status.

So, it's always advisable to go for rather than making use of youroverdraft facility.