Are Overdrafts Still the Most Expensive Way to Borrow?

There are many different ways to borrow money and they cost different amounts of money. This means that it is a good idea to compare them on price and see which will be lowest. You will also find that lenders will vary in how much they cost as well and so you will need to compare them as well. However, you will need to note that there are reasons for these cost differences and you need to consider value for money as well. This is because you will find that there are some loans which will be better suited to you and your needs than others and you will need to do your best to identify these. There are some loans though, that you may feel that you want to avoid because they are known to be expensive. It used to be the case, for example, that overdrafts were considered to be potentially, one of the most expensive ways to borrow money. However, there has been an overhaul of the overdraft charging system and so things have changed. You may wonder whether they are still expensive or whether they are now more competitive.

How They Were Previously Charged for

It used to be the case that there were tow types of overdrafts. There was an arranged overdraft where a bank would offer a borrower a certain amount for money that they could use if the wanted. This was charged at a specific interest rate and there was often a monthly charge as well. Some people would borrow more than they were allowed which was called an unauthorized overdraft and this was usually charged at a much higher interest rate and they might have a daily charge as well. This meant that if people kept those overdrafts for a long time the charges could build up really quickly and it could be extremely expensive. In the end the government stepped in and brought in some new regulations with regards to overdrafts. 

How They are Now Charged for

The new rules meant that there could no longer be two levels of overdrafts. The idea was that the banks would just offer an authorized overdraft and that was all that they would be allowed to offer which would mean that less money could be borrowed so people could not get into such a high amount of debt. They would also be limited on what they could charge. It was deemed that it was confusing that they were charging interest and fees and people would not really know what they were going to be charged. Therefore, it was felt that if they only charged an interest rate then it would be really clear to the customers who was the dearest and who was the cheapest as well as being able to see how much it would cost them. This means that nowadays overdrafts are charged at around 35% – 40% interest. This is more expensive than some types of loans but there are loans that are dearer too and borrowers will easily be able to compare them and work out which will be the best for them.

How Competitive They are

It is well worth doing this and working out how they compare with other types of borrowing. With things like credit cards, it is likely that some will be dearer and some will be cheaper, it will depend on the card issuer as to how much they will charge. There are some types of loans which traditionally will tend to have low interest rates, such as mortgages but this is because they last a long time and this means that you will pay more over time. Rates vary between lenders too, so you will need to do some comparisons yourself to work out which looks like it will suit you the best.

Joshua

Writing is something that I never thought I would end up doing. I worked in insurance and banking and then did some teaching and management but then found myself in a position where I was out of work. I write a few books and they did well and in the end turned it into a career, writing for my own websites as well as for other peoples. Now I work as a freelance writer working in lots of different areas but tending to specialize in finance writing as it is an area that I know a lot about and find fun too.

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