Bank overdraft is the term used in the context of banking. Under this facility a bank allows an individual to withdraw money even when the account of the individual does not have enough funds. It can be compared with taking water from others bucket because your bucket of water that is the bank account is empty and you are taking money which you have to repay later with interest to the bank. In order to understand about bank overdraft, one should look at the advantages and disadvantages of bank overdraft –
Advantages of Bank Overdraft
It helps in overcoming financial crunch
The biggest benefit of bank overdraft is that it helps an individual in overcoming temporary financial crunch because no individual can plan perfectly about the income and expense of an individual during a particular period and if one has taken a bank overdraft than he or she does not have to worry about financial crunch. In simple words very few individuals keep two buckets of water and majority of people depend on one bucket of water and for those individuals bank overdraft is ideal.
Easy to Get
Another advantage of bank overdraft is that unlike others loans it is easy to get bank overdraft from the bank as it involves less paperwork and also does not require any substantive security which is the case with other bank loans like mortgage and home loans.
Flexibility
Another merit of bank overdraft is that it gives an individual flexibility for managing payments because ones work does not get held up due to lack of funds as bank overdraft acts like a bridge for an individual who has no funds presently but is expected to receive funds in future.
Disadvantages of Bank Overdraft
Interest Cost
The biggest drawback of bank overdraft is that one has to pay interest on the utilized amount of overdraft and that interest is high resulting in expense for an individual taking this facility. Hence for example, if an individual has bank overdraft limit of $50000 and rate of interest is 12 percent per annum. If an individual is utilizing full amount then he or she has to pay yearly $6000 to the bank which is a big amount if you consider it from individual’s point of view.
Complacency
An individual will get complacent thinking that he or she has overdraft facility which in turn will induce him or her to spend recklessly. In simple words, bank overdraft acts like a credit card because just like credit card result in individual spending on unnecessary things leaving little for
No End Solution
Another demerit of bank overdraft is that it is not an end solution for individual’s financial problems as it is only a temporary solution to solve financial problems because in the end, one has to repay it back to the bank along with interest amount. In simple words, if an individual is thinking that bank overdraft will solve all financial worries then he or she is in for a disappointment. One day you will have no water because there will be no other bucket from where you can fill the water resulting in a big problem for an individual.
As one can see from the above that bank overdraft has pros as well as and any individual thinking of taking overdraft from the banks should read above points carefully and then take the decision about taking the overdraft facility from the bank.