An overdraft line of credit is one of the most popular types of loans. Its popularity is mainly driven by the simplicity and the ease of use. The loan is directly tied to your credit account, and it allows you to pay your expenses and bills when you run out of money. Overdraft is useful to both companies and individuals. It allows companies to deal with everyday issues and overcome different types of business obstructions during the low season. Individuals use it to prevent missed payments and having their debit card canceled.
Like any other loan, the overdraft line of credit comes with interest. Although overdraft loans usually have higher interest rate than traditional loans, they are much more affordable than all other overdraft protection programs that usually charge $35 per every rejected transaction.
One of the greatest benefits of the overdraft line of credit is the fact it’s optional. In most cases, if you have an overdraft on your account and you don’t use it, you won’t need to pay any interests or fees.
Still, some banks may charge something, which is why you need to read the overdraft contract terms very carefully. Most people use this line of credit as a security that will save them in case they suddenly run out of money.
What will happen if your account goes dry?
We all know that we should spend less than we earn and that we need to have a ‘rainy day’ fund. Still, sometimes a sudden and unexpected event can catch us off-guard and easily dry out our account. Overdraft line of credit can be very helpful in this situation, although its ability to fix the problem, depends on the type of expenses and fees that are being charged.
Debit card transactions – If your daily shopping exceeds the amount of money you have in your debit account, the bank will receive the transaction and charge you for it if you don’t have an overdraft line of credit or some other similar protection. If you have an overdraft, the transaction will pass smoothly as usual.
Preauthorized payments – If your monthly bills are higher than the amount of money you have on your account, the transaction will be rejected and the bank will charge you an insufficient funds fee. You can easily skip this unpleasantness by filing for an overdraft loan or some other form of protection.
Checks – The bank will bounce your checks if you write it for more money than you have on your account. This is a common mistake because people usually write their checks several months in advance. The bounced check may cause you to pay additional fees. If you have an overdraft protection, you don’t need to worry about bouncing checks and your account sufficiency, while shopping.
What are the disadvantages of an overdraft loan?
Like any line of credit, an overdraft loan has more than a few disadvantages. Although it’s less expensive than all other types of overdraft protection, it comes with a much higher interest than traditional loans. Borrowing the overdraft funds for a day or two, won’t put you in trouble, but extending the credit for several months may result in incredibly high interest. The overdraft line of credit also comes with several unique fees.
Most users pay an annual fee for signing an overdraft contract. and a small fee that is charged each time you want to use the funds If you use the overdraft line of credit too often, the bank has a right to deny this service to you, delete your account and charge you with various fees and penalties. Most banks have strict dollar limits that usually depend on your monthly income.
The overdraft line of credit is a very helpful feature, which helps you to stay solvent and pay every expense on time. Still, it should only be used in emergency situations. Maintaining a positive account balance is the only way you can set your finances straight and avoid fees and extra costs.