Australians have a lot of financial obligations to keep track of. It’s not uncommon for a person to hold a dozen accounts with banks, lenders, service and utilities providers, clubs, retailers and more. Keeping financially afloat while the coffers are constantly diminishing is a wearying prospect, and the ongoing pressure of debt is a sign that things need to change. Loose spending and over-commitment can be reined in, but staying on top of finances requires a consistent and balanced approach. Often overlooked as a solution, a bank overdraft can provide smoother sailing for those who need to weather a financial storm.
The safety net of a bank overdraft provides peace of mind. Fluctuating fortunes can be balanced by using a bank overdraft for flexible access to money when it’s needed. When managed properly, an overdraft can provide leeway during times when money is short, with the account again replenished during more lucrative times. With an overdraft, funds are readily available, unlike other loan arrangements that lock borrowers in with rigid terms and conditions. Overdrafts have utility for both short and long term financial advantage when used wisely.
Advantages of a bank overdraft
A bank overdraft allows the withdrawal of funds in excess of the account balance. There are fees and interest involved, so understanding the advantages and disadvantages of a bank overdraft is essential to use it effectively. A history of responsible money management and a reliable income stream (or inconsistent but adequate earnings) are needed to access an overdraft facility. When used wisely, an overdraft can assist a person of average means to remain on top of finances, always having money on hand when required. There are quite a few bank overdraft facility advantages worth considering.
- Timing the flow of funds is particularly useful for plugging cash flow gaps. Paying bills, clients and even employees can be difficult when expenses temporarily outpace income. Using an overdraft, it’s business as usual, without unwanted financial headaches and distractions.
- Flexible bank overdraft arrangements mean the money is on hand whenever you need it. Interest is only paid on money used, so the overdraft facility can remain untouched and interest-free until needed. Flexible arrangements facilitate short-term and long-term overdrafts for meeting personal financial obligations and retaining composure even during occasional financial upheavals.
- Late payment fees are an unwanted and unnecessary expense that way too many people experience on a regular basis. A bank overdraft facility will automatically make timely payments to business and service providers even when there is no balance in your account. Developing a relationship of trust and reliability with your bank results in financial give-and-take for everyone’s benefit.
- Financial leverage is attained by accumulation of wealth, equity, and a good payment and credit history. A bank overdraft will ensure your credit record remains clean, while also helping you avoid embarrassing situations where a miscalculated bank balance leaves you short of ready cash.
- Interest repayments on a bank overdraft are often minimal compared to other loans. With an overdraft, interest is only paid on funds utilised, whereas other loan arrangements demand regular and fixed monthly interest repayments.
Disadvantages of a bank overdraft
Banks provide loan products and services based on the borrower’s capacity to make regular repayments. As with all such arrangements, bank overdrafts come with inherent risks that need mitigating. Prior to applying for a bank overdraft, it’s important to take a realistic look at ongoing income and expenses, and your ability to meet financial obligations in the short and long-term. Considerations include:
- Interest rates associated with overdrafts can be higher than other loan arrangements. On one hand, if the overdraft facility is used sparingly and purposefully, interest can be negligible. On the other hand, when the overdraft limit is continuously pushed or exceeded, debilitating interest repayments are inevitable.
- Your overdraft situation is regularly monitored by the bank. If a company suffers from business downturn or poor performance and financials appear weak, the bank can decrease the overdraft limit or withdraw the facility altogether. Conscientious overdraft use is essential to ensure the facility is available when it is most needed.
- Company collateral and inventory is often used as security for the overdraft facility. Failure to make payments can result in company or personal assets being seized by the bank.
As a stop-gap solution for emergency funding, an overdraft is hard to beat. It provides money to cover untimely business expenses or wage payments, while acting as a financial safety net moving forward. An overdraft can even provide the leverage required for business expansion, with funds being repeatedly replenished and reused for wide-ranging purposes. When used with accountability and a degree of foresight, an overdraft provides a smooth financial passage.
Bank overdrafts have a lot of valuable uses, however, control and caution is essential, as a detached or disinterested approach to finances is always ruinous. As with all financial products that include interest repayments, there are fees and penalties involved, and your overall wealth will grow or shrink depending on the way it is managed.