How are Unsecured Loans Better Funding Options Than Overdrafts?

By: Angelo Drew

What is an overdraft?

An overdraft is a facility (usually at a bank or other financial institution) that enables an account holder to borrow up to an agreed amount and often for an agreed time. The agreed amounts on an overdraft exceeds the deposits by the customer.

Overdrafts usually carry a severely high rate of interest. Research conducted by a leading financial states that 43% of the borrowers in UK exceeded their overdraft limit in the year 2006. This means that the Brits have paid ?895 million just as the interest on the overdraft facility.

How are unsecured personal loans better funding options than overdrafts?

Unsecured personal loans call for a much lower rate of interest than overdrafts. Recently, three high-street banks have increased their overdraft charges. This means that the customers using this facility will have to pay even more than before. On the other hand, if you have a decent credit score, you may get a competitive rate of interest on unsecured loans. Both these form of credit, overdrafts and unsecured loans don't ask for any security but there is a huge gap in between the interest charged on each of these.

Moreover, one can procure far better amount on unsecured personal loans. The credit limit on overdrafts is usually restricted and not all account holders are given this facility by the banks. As an unsecured loan, one can borrow anywhere in between ?500 to ?25,000. So, there is a greater flexibility. An overdraft usually doesn't exceed the authorised overdraft limit. When a customer crosses this limit, he is made subject to a penalty charge along with the normal interest charged on his overdraft. This not only creates a negative balance for the customer, but also adversely affects his credit status.

So, it's always advisable to go for unsecured personal loans rather than making use of your overdraft facility.

Unsecured Loans
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