Table of Contents
- Advantages and Disadvantages of the Bank Overdraft Facility
- Advantages of Bank Overdraft
- 1. Freedom of Choice
- 2. Early Repayment is Not Chargeable
- 3. Easy to Avail
- 4. No Bounced Cheque
- Disadvantages of Bank Overdraft
- 1. Overdraft Fees
- 2. Adverse Effect on Credit Score
- 3. Reduction of Credit Limit
- 4. Possibility of Seizing
An overdraft is a form of debt or credit arrangement that allows you to withdraw more money from your bank account than you have available. This can be useful if you need to make an unexpected payment or if you want to have some extra money available in case of an emergency. It helps you manage your cash flow smartly.
Another best thing about the bank overdraft facility is that you can draw money up to an agreed limit anytime you want. So are there any downsides to this wonderful facility? Let’s find out in out!
Advantages and Disadvantages of the Bank Overdraft Facility
You’ve come to the right post if you are apprehensive about the overdraft offered to you by your bank. It’s natural to have doubts like these – Are there any disadvantages to this perfectly looking arrangement? Will you be able to pay off your overdraft on time or not?
Take a look at the following advantages and disadvantages of the bank overdraft facility and decide for yourself!
Advantages of Bank Overdraft
Let’s see why taking the bank overdraft is a good idea!
1. Freedom of Choice
You can withdraw the amount you need. There is no minimum limit. Of course, there’s a maximum limit, but that is decided according to your usage and credit history. You can borrow the money for as long as the time limit is agreed upon between you and your bank.
2. Early Repayment is Not Chargeable
You won’t be charged any fees for paying off the overdraft amount early because you don’t borrow money for a specific time from the overdraft facility. You can repay the amount anytime without worrying about an early repayment penalty.
3. Easy to Avail
If you want a loan from a bank, you need to spend some time and effort on the paperwork and formalities. But if you have a successful track record with a bank, it’s much easier and simpler to get a bank overdraft facility.
4. No Bounced Cheque
If you do a lot of transactions through cheques, you may miscalculate specific payment dates. If the cheque comes into your account with insufficient funds, your credit score gets adversely affected. An overdraft doesn’t let any of your cheque bounce.
Disadvantages of Bank Overdraft
There’s hardly anything in this universe without a downside. So what’s the catch here?
1. Overdraft Fees
Nothing in this world is free! Bank overdraft also comes with fees. This fee is what the bank charges you every time you spend more than you have in your account. This is not included in interest. That is separate.
2. Adverse Effect on Credit Score
Overdraft does affect your credit score but not directly. The credit bureau doesn’t look into your overdraft. But if you fail to repay your overdraft, the bank may send your account through a collection process. And that is not good for your credit score.
3. Reduction of Credit Limit
Overdraft is a form of debt that banks provides but keep revisiting it. So if you have the bank overdraft facility in your commercial account and your company is not performing well, the bank can reduce your overdraft limit. This can happen due to a variety of reasons for personal accounts also.
4. Possibility of Seizing
The bank can seize your account if you don’t pay off the overdraft in the committed time. Some companies put their assets, such as shares, at stake to secure overdraft facilities from the bank. These assets can also be seized in case of non-payment.
You should carefully consider all the advantages and disadvantages of the bank overdraft facility before applying for it. If you’re in a tight spot and need cash quickly, a bank overdraft can be a lifesaver. However, the fees and interests associated with overdrafts are also high.
So it’s critical to use overdraft as a form of debt only when it’s absolutely necessary. Make sure you understand the terms and conditions of the facility. Also, shop around and compare rates from different banks to ensure you get the best deal possible.