It is often said that we should repay our debts early. However, if you have debt such as an overdraft you may wonder whether it is worth trying to repay it early. It is good to have an understanding of overdrafts and then you will be able to make an easier decision as to whether you should make extra efforts to repay them.
How Overdrafts Work
An overdraft is on a current account and it works by allowing you to take out more money than you actually have. The bank or building society will let you know how much money you can borrow and then you will be able to use it for BACs payments, to draw cheques against and to draw cash. This will mean that you will be able to have it fall back on in an emergency, although some people do use them for all sorts of things including purchases that are not emergencies. There is not an official repayment schedule but the loan will be automatically repaid as money goes into the current account. Some people will allow that to happen and others may open a second current account so their salary does not repay the overdraft and therefore they delay repaying it.
How Repaying Quickly Can be Beneficial
It is really good though to try to repay it and do so as quickly as you can. This is because you will be charge interest on the money that you have borrowed and that interest will be charged daily until it is paid off. This means that you need to think about the cost of the loan and that if you can pay it off quicker then you will save money. Interest on overdrafts is very high as well – probably around 35% – 40% which is high compared to other borrowing methods and so you need to try to think of a way to make sure that you do not keep the loan for very long. Those people that keep them for a long time will end up paying out a lot of money and this is best avoided where possible.
How to Repay Early
So it is easy to make repayments as you just put money into your current account. Of course, finding the money to put in could be a problem but there are some different things that you could consider trying –
- Sell things that you own and no longer need or want to raise some money using social media for sale pages, eBay, car boot sales etc
- Use money from any savings accounts that you have to pay it off
- Do some temp work to bring in some extra money
- Find some extra freelance work
- See if you can work some overtime in your current job
- Look for some online work
There are different things that you can try and this is by no means an exhaustive list. It can be good to think about what you might have the time to do and what will suit the skills that you have. Alongside earning more, it can be a good idea to see whether you can reduce the amount that you spend. If you can cut back on buying things that are not necessary and try not to pay more than you have to for things, then you will be able to spend less money and you should have more to put towards paying off the overdraft. It may take a while, but it is worth persevering and trying hard to pay it off as soon as you can so that you avoid paying interest as much as possible.