Overdrafts exist because they provide a safety net to users in need to cover their short-term expenses when they have insufficient funds in their bank accounts. People use a bank overdraft to continue purchasing and paying bills even if their account balances are low. Yes, an overdraft will be your savior that acts as a short-term loan, especially for anyone in need of rush finance.
Bank overdrafts are lifesavers, commonly used by people as a financial tool. An overdraft is best used wisely. When you need cash to cover your bills yet your payday is still a few days away, you can consider an overdraft.
Understanding bank overdrafts
Bank overdrafts are short-term loans provided by the banks when an account balance is below 0. An overdraft by a bank lets you spend more than what your account balance has up to a certain limit. An overdraft comes in different forms, such as:
- Arranged or pre-approved
- Unarranged or not agreed in advance
- Usually more expensive
If you are wise enough, you can go for the unarranged overdraft. But, you should limit your expenses.
When does using an overdraft make sense?
Some situations that can make you avail an overdraft are smart or least acceptable moves.
Unexpected expenses
Life situations are unpredictable. Your budget can be off balance, but your car breaks down unexpectedly. An urgent travel is calling you or you need an emergency dental, but you see your account balance goes zero. An overdraft is a friendly stopgap to cover the necessary expenses and have no quick access to savings.
All these life situations happen unexpectedly and an overdraft can save you.
Timing gaps between income and bills
Sometimes, your paycheck is a few days away. Your bills are due and others are overdue, yet you have nowhere to get funds. Overdrafts help bridge the gap to keep the payments on time and not charge you more for the overdue. It protects you from credit score and prevents you from late fees.
Short-term cash flow management
Overdrafts are helping you manage cash flow on lean periods for people with irregular income, such as:
- freelancers
- gig workers
- small business owners
Avoid bounced payments
Bounced checks come with fees from your company expecting payment and bank. It costs less for you in the long run, if an overdraft avoids those.
Advice to not to use an overdraft
Overdrafts are not a means for lifestyle inflation or long-term borrowing. It is advised not to use an overdraft in situations, such as:
- You want to splurge
- You’re already juggling debt
- You have no repayment plan
Tips when using overdraft
When you plan to use an overdraft, you should follow these helpful tips:
- Know your limit
- Pay it back as soon as possible
- Watch the fees
- Use alerts
Conclusion
An overdraft is your security net and not a spending tool. It must be used responsibly and occasionally to help you handle little surprises in life without derailing your funds or finances. It is best to manage your finances, you should not overuse an overdraft.
