Loan or Overdraft – Which to Choose
Choosing what type of credit to have can be a very important decision. It can make quite a big difference, price wise as to how much you pay in the long term for the money that you have borrowed.
If you have negotiated an overdraft with your bank, then this can certainly help to keep the cost down. If you borrow money without organising it they will be a charge and there could be anyway depending on the terms that you have agreed with your bank. There is likely to be interest on it as well, although in rare cases you can get a free overdraft for a certain time period. Obviously borrowing money for free is the best way to do it but it is very unusual to be able to do this. The charges for an overdraft which has not been negotiated with the bank, can be very expensive and it is a good idea to check what they are before you use this facility. Try to be organised and talk to the bank and negotiate an overdraft if you can or extend the one you have as this should be a cheaper way of borrowing.
Borrowing money using a loan can be a better way of doing things. It can be more of a hassle, organising a loan with the bank, but it can work out cheaper. It is worth checking out the interest rates for loans and comparing them to those for an overdraft. It is also worth considering the term. If you take out a loan and pay it back over a year then it could work out more expensive, even if the interest rate is lower than an overdraft. This would happen if you were paying the overdraft off more quickly.
An overdraft is a good way of borrowing in the short term and a loan for the long term generally. But each case should be looked at individually and calculated, in order to find out which is the best deal in that particular situation. Think about your repayments and how much you can afford to pay back each month and this will give you an idea of how long you will need the loan/overdraft for, This should help you to calculate which will be better. There are even online tools which will calculate the cost of loans for you and so it could be worth using one of these to do the sums for you.
