Most of us will have an overdraft that is toed to our current account. Our bank will determine how much we are allowed to borrow and will set a credit limit. This will be the amount that we will be allowed to borrow up to. The amount will vary depending on the bank that we are with and depending on the person as well. Sometimes it can be possible to extend or increase the amount that we are allowed to borrow. This has advantages and disadvantages and it is a good idea to be aware of both and then we will be able to decide whether it will be a good idea for us to extend our overdraft or not.
Advantages of Extending an Overdraft
Extending an overdraft can be useful if you want to borrow more money. You will have more money available to borrow which means that you can spend more. Therefore, if you need money quickly and the overdraft is not normally enough or you often need more money than you have, then this could help you out. It can also be reassuring to know that there is this money available if you need it. Many of us will worry that we will not have enough money in an emergency and so knowing that overdraft is large, will help to give us reassurance that there will be some money available for when we need it. This can reduce our stress levels and allow us to stop worrying so much about whether we will be able to afford to buy everything that we need, because we will know that there is money there that we can borrow if we need it.
Disadvantages of Extending an Overdraft
Whenever we borrow money, we will have to pay for it. With an overdraft we will be charged interest for every day that we have it. The interest rates for overdrafts tends to be 35% to 40% and this means that they can be very expensive compared to some other types of borrowing. It can therefore be worth thinking about whether it is a good idea to extend them or whether it might be better to look into alternative ways of borrowing.
Having access to more money is not always a good idea either. It will mean that we will not be forced to budget and therefore we could end up spending more than we have. Some people will even see an overdraft as money that is theirs to spend and despite the large interest rates they will always spend it. If this is the case with you, then extending the overdraft will mean that you will keep paying those high rates which will be expensive. It is worth thinking about whether it will be better to find a way to spend less money rather than relying more on borrowing.
Once we do extend the overdraft amount, we may find that it is still not enough and want to extend it more and more. This could lead to us borrowing really large amounts of money and that will mean that we might struggle to repay it. If the overdraft is bigger than our salary then we will not repay it each month. Even if it is smaller, we may still struggle with it if we have lots of other bills to pay. It could be better to see whether there is a way that we can reduce the amount of money that we are spending instead. We might be able to choose cheaper items or buy less and then we will not need to borrow more money.