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Loans & Borrowing - Overdrafts
Overdrafts are the kind of loan that is provided to a customer by the bank and are solely to be used for emergency situations. An overdraft is usually a set amount of money that comes with a limit and you cannot borrow beyond that limit. The repayment dates are not fixed and the bank’s decision is solely based on the customers past financial record and credit history.
- You can apply for an overdraft if your spending exceeds the amount you have in your bank account. Often there is a limit to how much money you can take out in form of a bank overdraft but you can also put up a request to your bank to stretch your overdraft limit. Note that the bank’s decision to increase your overdraft limit will be purely based on your credit rating so it’s important to maintain a good credit history i.e. not missing out on any repayments and always paying back on time.
- An overdraft can be repaid by simply depositing the used amount of money into your bank account. In case you abuse this facility of overdraft, the bank reserves the right to withdraw the facility and ban you from receiving any overdrafts in the future. Note that abusing overdraft facility can leave a very negative impact on your credit report.
- Overdrafts fall into the category of “unsecured loans” and the customer may be charged very high interest rates. There are different kinds of overdrafts, depending on the lender i.e. the bank. Some banks offer interest free overdrafts where as some charge interest fees if your overdraft exceeds a specific amount of money.
- Penalty fees are applied if you fail to repay the amount within a certain time limit. Some banks will give you as little as five days to replace the funds. Some ways of avoiding late payment penalties include managing your finances wisely and not exceeding your overdraft limit; also replacing any used funds in due course of time.
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