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An overdraft facility sounds like an attractive option whenyou’re in a fix and suddenly need access to more money than you have in yourbank account.
While it can be a great help in a predicament, make sure youknow what it will cost you.
HOW IT WORKS
An overdraft facility is offered by your bank, often whenyou open a transaction or current account, but you can also apply for it. It’scredit that’s available in your transaction account – where your salary isdeposited and your debit orders are paid from.
If you have to pay for something that costs more than thebalance in your account, you can go into overdraft without the transactionbeing stopped. So it gives you access to extra funds when the balance in youraccount is nil.
The credit made available to you can range from R500 toR500000 depending on what you qualify for in terms of your creditprofile. You can use all the funds or just a part of it whenever necessary.
Because the facility is linked to your regular transactionaccount, you don’t have to open a separate account, use a credit card or applyfor a loan. You can also apply on your banking app to have the limit reduced orincreased.
No minimum monthly re-payments are required. The overdrawnamount is paid off by deposits into your account, for example when your salaryis paid in.
You can also apply for life insurance on the overdraftfacility. Should your account have a negative balance when you die or getretrenched, this debt will be covered. But find out first what this insurancewill cost you.
THE ADVANTAGES
The funds are available regardless of whether you use thefacility or not. As a result, many people use it to solve temporary cash-flowproblems, for example when you have unexpected expenses.
Debit orders don’t bounce, and fines aren’t charged fordebit orders if your account balance is in the red.
Because your income is deposited into the account, anoverdraft is less risky for the bank and your interest rate and fees areslightly lower than with a credit card, depending on your credit profile.
Each individual’s interest rate will be different becauseit’s based on your personal credit profile. You only pay interest on the amountyou’re overdrawn by, not on the total amount available.
THE CONDTIONS
You must have a transaction account into which your salaryis deposited, and the bank will verify your risk profile to determine if youcan pay your overdrawn account on a monthly basis.
Depending on the bank, there’s usually a minimum salaryrequirement, for example R8000 a month. To apply you must submit your IDand three recent salary slips.
If you already have a transaction account, you can apply viayour banking app.
THINGS TO LOOK OUT FOR
Many people think that because they pay interest only whenthey use the overdraft facility, they also only pay monthly fees then. Checkwith your bank how its overdraft facility is structured. You could be payingmonthly service fees just to have the facility available, whether you’reoverdrawn or not.
If the monthly service fees are high, it’s not worth havingan overdraft facility if you don’t really use it. There’s usually also aone-off activation fee that depends on the total amount of available overdraftcredit, so it can range from less than R100 to more than R1000.
It doesn’t necessarily work out cheaper than a credit card.Even if an overdraft account’s interest rate is sometimes lower, credit cardshave a number of interest-free days, while interest starts being charged fromthe moment you go into overdraft. This means the maximum interest charged, bylaw, can be: the repo rate x 2,2 + 10%. The repo rate is now 3,5%, so themaximum interest that can be charged is 17,7%.
The main pitfall of an overdraft account is when people useit for expenses that aren’t urgent or essential. Then when you need theoverdraft facility for an emergency, there isn’t enough money available and youmust apply for a loan.
Budget for your expenses and don’t use the overdraftfacility for everyday expenses such as clothing or food.
It’s easy to start seeing an overdraft as part of yourbudget and to forget it’s actually a credit convenience. If you’re using it allthe time it can become a vicious cycle of available debt that you never manageto pay off.
If you’re married in community of property you need yourspouse’s permission to apply for an overdraft facility.
