Most of us will have an overdraft option with our current account. We will have the option of borrowing some money if we need to. However, that overdraft could be expensive and we may wonder whether it is worth looking around for a cheaper one. There are advantages and disadvantages of doing this and it is a good idea to think these through before deciding whether to get a cheaper overdraft.
Advantages of a Cheaper Overdraft
If you want to have a cheaper overdraft then switching your current account to a bank that has one will save you money. You could find that there is quite a considerable difference between banks with regards to the amount that you are charged for borrowing. It is important to be aware though, that some will charge for you to have a current account and these may have much cheaper overdrafts. You will need to do some calculations here as to whether it will be cheaper for you to pay that charge and pay less for the overdraft or not. This will depend a lot on how often you use the overdraft. You will find that if you use it a lot then it will be much more worthwhile. If you rarely or never use the overdraft then it is unlikely to be worth paying unless there are any other benefits as well that you feel will make it good value for money.
You may not feel that the cheaper overdraft will make that much of a difference. However, overdraft costs can vary quite a bit. They tend to be between 35% and 40% and that 5% difference could be really significant. If you go overdrawn for a year, borrowing £1,000 for example then that will be a difference of £50 which could buy quite a lot of things. Also, why pay more than you need to?
Disadvantages of Changing Banks
In order to have a cheaper overdraft you will have to change your current account. This means that you will need to move to a new bank and this can be a difficult thing to do. Although the banks are supposed to assist you and automatically swap over your direct debits and standing orders etc, it can still be a tricky thing to do. You will need to think about whether you are willing to go through this effort to save the money.
It is also worth thinking about the fact that the bank may change their interest rate. Overdraft rates are variable which means that they can be changed at any time. There is a possibility that they might go up just after you have switched and you may have been better staying where you were. Of course, this is a risk whenever you borrow money at a variable rate as you could find that you will end up being charged more after a while and you have to decide whether you feel that this risk is worth taking or not.
You may have other products with your bank and you may find it convenient to stay with it. Sometimes you get a better savings interest rate, if you have a current account with the bank as well, for example. It is also good to think about the convenience of being able to transfer money between accounts, which may not be so easy if they are not all held with the same bank. You may be able to do it using online banking, but you should be able to set up a BACS payment or details so that you can still do this fairly easily anyway. So think about whether the small effort in setting these payments up will be worth it considering the money that you will save by switching.