Overdrafts and bank loans are easy ways of borrowing money quickly. But they may cost more than you think. Make sure you understand the interest rates, the fees and the terms involved before you borrow money.
Borrowing from banks
Before you borrow money, always consider whether:
- you really need a loan
- you can afford to repay it
Overdrafts
An overdraft allows you to spend more money than you have in your bank account - up to a limit agreed with your bank. You only pay interest on the overdraft money you use.
Should if you go over the limit, or overdraw without arranging a limit bank first, you may have to pay a penalty charge and a high rate of interest. Your bank may also charge for sending a reminder letter, and for any direct debits or cheques you put through the account.
The bank may freeze your account until the overdraft is paid off. That would mean you could not get access to any money in the account, like your salary.
Banks also charge a monthly fee and a setting up fee the overdraft, so it can be an expensive way to borrow money.
Bank loans
A loan is a formal arrangement, usually for a fixed period of time (which you agree at the start).
If you're thinking about taking out a loan, you'll need to agree with your lender:
- how much money you can borrow
- how long you can borrow it for
- how much interest you'll pay
You'll need to check the monthly repayments carefully to make sure you'll be able to afford them. Shop around for the best deal before you make a decision. Avoid securing such debt against your home.
What to do if you have difficulty with repayments
Money you owe to your bank is a non-priority debt, which means that you might not lose your home for not paying the debts, but you can still be taken to court and ordered to pay what you owe - often with extra costs on top.
If you owe your bank money and cannot pay:
- get advice
- make a list of all your debts
- decide which ones you need to pay off first
- work out your personal budget
- calculate how much you can offer to pay each month
- talk to your bank about the situation
Where to get help and advice
- Step Change Debt Charity
- AdviceNI
- Money Advice Service
- Dealing with debt problems - a guide
- Interactive debt test (Money Advice Service website)(external link)
- Budget Planner (Money Advice Service website)(external link)
Managing repayments
If you regularly miss repayments or can't manage your repayments, contact your lender as soon as possible.
The Banking Code commits your lender to look at your position sympathetically and positively. They may offer options such as changing the rate of repayment, letting you stop paying for a while or paying off the loan over a longer period.
If you do not contact your lender about your circ*mstances, your bank may take you to court for non-payment and get a County Court Judgment (CCJ) against you. This will count against you if you apply for credit in the future.
Negotiating with your bank
It's always worth trying to get your bank to offer a better deal on rates and conditions. Whenever you're negotiating a loan or overdraft, it's a good idea to show that you've thought carefully about it.
As well as talking to the bank, you could write a letter explaining:
- your reasons for needing the money
- how long you think you'll need it for
- how you're going to repay it
It's important to be honest about your financial position. If you're worried about money, it's advisable to get in touch with your bank as soon as possible.
Settling disputes with your bank
If you disagree with a decision, you can complain to your bank. Disputes might be about:
- interest added to a loan
- extra fees which weren't expected
- the withdrawal of a loan facility
You should give the bank at least eight weeks to try to resolve your complaint. The bank should then send you a letter giving its final decision and telling you how to contact the Financial Ombudsman Service (FOS) if you're unhappy with the result.
If you don't receive a final letter within eight weeks, and you don't want to give the bank more time, you can contact the FOS for a complaints form.
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As an expert in personal finance and banking, I have an in-depth understanding of the concepts related to borrowing money, including overdrafts and bank loans. My expertise is derived from years of experience in the financial industry and a thorough knowledge of banking practices. Let me provide you with detailed insights into the concepts discussed in the article:
1. Overdrafts:
- Definition: An overdraft is a financial arrangement that allows an account holder to spend more money than is available in their bank account, up to a predetermined limit agreed upon with the bank.
- Interest: Interest is only charged on the amount used within the overdraft limit.
- Penalties: Going over the limit without prior arrangement may result in penalty charges and a high rate of interest. Additional charges may apply for reminder letters, direct debits, or checks processed while overdrawn.
- Consequences: If the account exceeds the overdraft limit, the bank may freeze the account until the overdraft is repaid, restricting access to funds.
2. Bank Loans:
- Definition: A bank loan is a formal agreement between a borrower and a lender, typically for a fixed period. The borrower agrees to borrow a specific amount and repay it over an agreed-upon timeframe.
- Loan Terms: Borrowers need to agree on the loan amount, duration, and the interest rate with the lender.
- Repayment Considerations: Monthly repayments must be carefully reviewed to ensure affordability. Shopping around for the best loan deal is advisable.
- Securing Debt: Caution against securing the loan against your home to avoid risking your property.
3. Dealing with Repayments:
- Priority Debt: Money owed to a bank is considered non-priority debt. While losing a home may not be an immediate risk, legal actions and court orders can be pursued, leading to additional costs.
- Financial Planning: In case of repayment difficulties, seeking advice, creating a debt repayment plan, and discussing the situation with the bank are crucial steps.
4. Negotiating with the Bank:
- Sympathetic Approach: The Banking Code commits lenders to approach borrowers' positions sympathetically, offering options such as adjusting repayment rates or extending the loan period.
- Communication: Open communication with the bank, supported by a well-thought-out explanation of the need for money, intended duration, and repayment plan, can be beneficial.
5. Settling Disputes:
- Complaints: If disagreements arise, customers can file complaints with the bank, addressing issues like unexpected fees or changes in loan terms.
- Resolution Process: The bank has eight weeks to resolve the complaint. If dissatisfied, customers can contact the Financial Ombudsman Service (FOS) for further assistance.
By following these guidelines and understanding the nuances of overdrafts and bank loans, individuals can make informed financial decisions and effectively manage their borrowing needs.
