An overdraft is a common form of borrowing that offers financial flexibility, but can quickly become unmanageable if you are not aware of the pitfalls. High interest rates, daily charges, and the possibility of having to repay the overdraft in full on-demand, all have the potential to affect your financial stability.
What are overdraft debts?
Banks and building societies often offer overdraft facilities on their current accounts, whereby you can withdraw more than the balance of your account, up to a pre-agreed limit and timeframe.
They are a flexible way to borrow for the short-term. An overdraft can tide you over until your next payday, for example, but it is important to repay it as soon as possible as interest and fees can soon mount up.
How do bank overdrafts work?
When an overdraft facility has been arranged with your bank or building society, you are able to take more money out of your account than is actually in it. This creates an overdrawn balance that attracts interest and potentially other charges.
As long as you stay within the overdraft limit these additional amounts can be contained up to a point, but if you exceed the overdraft facility high additional rates of interest and other fees come into play.
When you arrange an overdraft your bank or building society may set a time limit for its use, but you can repay it with no early repayment charges. Interest may be added at either a fixed or a variable rate, a fixed rate being preferable as you have more certainty over how much you owe.
What are the dangers of taking on overdraft debts?
Your bank or building society can demand the immediate repayment of the overdraft at any time. This is particularly worrying if you also owe other debts, and can make a difficult financial situation seem impossible to deal with.
An expensive method of borrowing
If your bank is only prepared to offer an overdraft with a variable interest rate, and also charges daily fees or administration charges to put the overdraft facility in place, it can be an expensive way to borrow. You may be better off using a different type of borrowing.
An unauthorised overdraft occurs when you do not pre-arrange a facility with your bank and withdraw more than the balance of your account, or you exceed a pre-agreed overdraft limit. Unauthorised overdrafts attract high rates of interest, plus fees and other charges that can quickly create a debt spiral.
How we can help you deal with overdraft debts
UK Debt provides independent professional advice to people struggling with overdraft and other types of debt. We can quickly assess your current financial situation and offer a structure to escape the debt spiral.
It is easy to feel overwhelmed by the additional interest and charges commonly inflicted by lenders, so finding the best solution for you is our priority. There may be a number of options available, including unofficial negotiations with your bank and other creditors, or perhaps a formal debt remedy such as an Individual Voluntary Arrangement (IVA) if you are eligible.
What if you cannot repay your bank overdraft?
If you find yourself unable to repay your bank overdraft – maybe your bank has unexpectedly demanded repayment in full, or it is proving difficult due to other debts – we can step in and negotiate on your behalf.
The input of licensed insolvency practitioners can influence your bank in a positive way, and demonstrates that you take your financial situation seriously. Maybe an unofficial but properly structured instalment plan would be in order to repay the overdraft, or the bank may be open to a formal restructure of your debts through the aforementioned IVA.
If you are eligible for an Individual Voluntary Arrangement, we may be able to negotiate a single affordable monthly payment if you owe money to multiple creditors and feel that you cannot cope with your debts as they stand.
Bank overdrafts are just one of the common debt areas where we can help. Call our expert team of licensed insolvency practitioners to arrange a free same-day consultation to establish the best way forward.