If you have an overdraft you might wonder whether you should be making more efforts to repay it quickly. There are some advantages to doing this as well as some disadvantages.
Advantages to Repaying
Overdrafts cost money. They tend to cost about 40% interest which adds up to a lot of money in real monetary terms. So, if you owe £100 for a year then you will pay £40 in charges. Forty quid might not sound like much but if think that is only for owing £100 which is not much really. Therefore, if you repay it then you will avoid having to pay this money.
There have been changes to overdraft costs lately so for some people they will be cheaper and others they will be dearer. It is a bit complex to explain why but it is still better to repay the overdraft as quickly as you can if you would like to save money.
It can also show on your credit report that you will have an overdraft. This could go against you if you want to borrow money, rent a property or anything else where someone will be checking your credit report, you want to make sure that it is as good as possible and this might not look good for you.
Disadvantages to Repaying
It might seem like it will always make sense repay as quickly as possible. However, there are things that you should consider first. For example, if you have other loans from companies like Emu.co.uk, it is good idea to check how much they are costing you. It will make financial sense if you tackle the one that is costing you the most money first as then you will be paying out less in interest and charges. Make sure that you are aware of how much it costs you in full and then you will be able to check this. Be aware of the fees, charges and interest when you do these sums.
You may also find that if you repay the overdraft, that you will not have enough money to pay for other things, the perhaps are essential to you. This could include things like food which you will not want you or your family to go without.
How is an Overdraft Repaid?
It is also worth thinking about how an overdraft is repaid as well as this can have a bearing on whether you repay it. The overdraft is on your current account and this means that you will repay it automatically when you have money going into the bank account. So, if you get paid, then this could be enough money to cover that overdraft and it will automatically be paid off. Some people have several current accounts and have their income paid into a different one to the one with the overdraft so that they do not have to repay it automatically in this way. It is worth thinking about whether this is sensible though. If you repay it, you can always go overdrawn again if you need money for essentials like food, but in the mean time you will not be paying the interest until you do need to borrow again.
Therefore, it is probably better to make judgements based on your own personal situation. If you have more expensive loans then concentrate on repaying those first. However, you will probably also find that your overdraft will repay itself when you get paid. You do need to think about whether you are managing the debt though. If you keep borrowing more and more each month then it is worth taking stock of your situation and working out whether you should be changing your spending habits so that you do not have to borrow so much each month.