Those who need a quick and convenient way of borrowing money for a short period of time should look into obtaining an authorised overdraft. Authorised overdrafts, or planned overdrafts, are services provided by banks and building societies, and are often a preferred alternative to credit cards and loans to see a person through a brief hiccup in their financial affairs. These temporary loans kick in should the balance on a bank account fall below zero, meaning a customer can continue making payments and withdrawing money from their account even if they do not technically have any left. They are different to unauthorised overdrafts, where borrowers go into overdraft without agreement from their lenders, and can incur hefty overdraft charges as a result.
How do Authorised Overdrafts Work?
An authorised overdraft is named as such if a bank has given permission for their customers to borrow their money up to a pre-agreed overdraft limit. How much a bank will lend depends on an assessment of their customer’s personal circumstances such as employment status and any earnings.
Once a person has had an overdraft approved they can later apply for further increases to their existing overdraft, depending on how well they are currently managing their finances. Lenders do, however, have the power to reduce or demand repayment of an overdraft at any time, though borrowers should be given 30 days’ notice of any changes.
Authorised Overdraft Charges
As an authorised overdraft is still a form of credit, holders of bank accounts using such services will usually incur interest charges daily, monthly, quarterly or even annually for as long as they are overdrawn. Though there is sometimes no fee for setting up an overdraft, most people will incur overdraft charges once their bank balance reaches zero but continue to use their account. Student accounts – offering specialised student overdrafts – tend to have lower fees in this area.
Authorised Overdraft Rates
Overdraft rates are dependent on the amount a borrower is overdrawn by. They can be quite reasonable if the borrower has shopped around for the best lender, and has stayed within the limits of their authorised overdraft. However, if a person goes over their overdraft limit, even by an insignificant amount, they may be heavily penalised with high interest rates specified for accounts with an unauthorised overdraft – which may cover the full amount overdrawn and not just the amount above this set limit. Breaking their credit limit may also affect the borrower’s credit rating.
Fee Only Authorised Overdrafts
Some lenders have stopped charging interest on authorised overdrafts, opting instead for a flat fee per day or per month for each day their customer is overdrawn. This can be quite pricy, particularly if any additional charges are levied onto the borrower such as a monthly management fee or a charge for each overdraft transaction. Nevertheless, certain providers do offer overdraft facilities free of charge for a certain period or up to a certain amount.
Advantages of Authorised Overdrafts
It cannot be denied that authorised overdrafts provide a safety net for those who need help maintaining their cash flow, and, if used responsibly, can take a huge weight off a person’s shoulders. Furthermore, repaying an authorised overdraft involves much more flexibility and will not be subject to early repayment charges, which is usually the case with more traditional loans.
Compare Authorised Overdrafts
Those who feel they do need a helping hand with any unexpected expenses are advised to compare authorised overdrafts with other borrowing products and between various lenders to find the best deal suitable for them.