A Loan Or An Overdraft – Which Is The Cheaper Option?

The last few years have seen a major loosening of the criteria for overdrafts, with many banks offering them as a matter of course. This has resulted in the majority of UK bank account holders taking up the offer of an overdraft, often over the choice of a short term loan – but which one is really best for you?

There is no doubt that if you are looking for a small short term lump sum, then in theory an overdraft may suit you best – assuming you will soon have the funds to repay your overdraft. But what actually happens in reality?

In reality the moment you receive an overdraft facility the chances are that you will use it every month and it will slowly become a major element of your financial resources. The problem is that while many banks may offer a small free overdraft, the larger overdrafts are likely to charge a higher interest rate than traditional loans – meaning interest charges will also become part of your monthly outgoings.

At least with a loan, you have a structured approach and you can physically see the amount outstanding falling as the payments mount up. Loans are very often agreed at lower rates than overdraft facilities (many of which will also charge a monthly fee, as well as interest) offering longer term savings.

Be very careful when accepting that most generous of overdraft facilities, they are not always the cheapest option and do not forget that they are actually repayable on demand!