Ave you ever encountered the term overdraft or an overdraft? Don’t know what exactly that means? You will find the answers in the article.
The term overdraft refers to a banking service belonging to a current bank account, which allows the client to withdraw money from the bill even if he does not have sufficient cash in the account. Therefore, it is often referred to as an overdraft. In such a case, the bank will operatively lend the funds to its client, going into deficit on his current account. Such an existing account with an agreed overdraft is referred to as an overdraft. It is a combination of a deposit and a credit account.
What are the overdraft parameters?
The main parameters of the overdraft include the credit limit, i.e., the maximum amount that the bank will lend to the client. The loan is provided only up to the amount of the pre-agreed credit limit. This is a permitted overdraft on the current account. Another parameter is the interest rate, i.e., the price for money borrowed in this way and fees for arranging and maintaining an overdraft account.
There is usually no fixed installment for the overdraft, but the client is obliged to repay this loan at a specific time and get a plus with the account. When he does so, he can continue to draw the overdraft.
An overdraft is one of the most essential and standard short-term loans, and the amount of the limit is a vital advertising topic for individual banks. It is an unsecured and non-purpose loan, so it is associated with a higher interest rate and sometimes a fee from the unused part of the overdraft. The overdraft is suitable for entrepreneurs as well as for individuals.
Entrepreneurs can use an overdraft to cover a short-term decline in liquidity and bridge a more demanding period. It is a short-term loan with a maturity of up to one year.
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Caution is in place with an overdraft account.
It may seem that an overdraft provides freedom, but it is just an appearance, and the overdraft needs to be treated with caution. Especially clients with lower financial literacy should be careful when using this account. It can very quickly happen that the owner of such an account finds himself in a situation where he will be without funds, but the ATM will gladly give him the money. Clients can then pay for such behavior and become debtors with foreclosures.
How to get an overdraft account?
Ideally, you should request this type of account from the bank where you previously held the account. The bank can estimate your financial behavior and overview the movements in your account.
If you decide to create an overdraft account with another bank, this bank will likely require you to transfer funds to your new account.
Advantages and disadvantages of overdraft
Like everything, an overdraft has its advantages and disadvantages.
Advantages:
- You get the money fast, and you don’t have to prove the purpose
- You do not need to apply for a loan and wait for approval
- You can borrow at any time
- You don’t have to worry about repayment, and it’s up to you how quickly you repay the overdraft
- You withdraw money.
Disadvantages:
- Your account needs to be active
- You draw money only when you spend your funds entirely
- Overdrafts may be associated with overdrafts
- There is a high-interest rate on an unsecured loan
- The loan starts to bear interest immediately after its origination
- Is limited.
An overdraft is like a fire, a good servant but a bad master. It can provide us with significant help in some life situations, but it is easy to get used to this way of using the account, which can quickly get the client into debt. And if the debts are accompanied by a possible fine for unauthorized overdraft or late payment for the loan, one can soon get into a difficult life situation. It is therefore essential to use an overdraft with common sense and prudence.
