Many people do not really understand how overdrafts work and may even be using theirs without proper knowledge. It is really important to understand them and know how they are set up so that you can make the best use of them for you and not spend too much money in doing so.
Firstly it is important to understand the difference between the types of overdraft. An authorised overdraft is one that you have negotiated with your bank. They may offer you an overdraft facility with your current account or you may ask them. Either way it is an agreed overdraft. Usually when you see your bank statement it will show this on it and maybe even when you go to the cash machine it may show how much money you have and how much is available and these will be different, with the authorised overdraft amount added onto how much is available.
An unauthorised overdraft refers to when you withdraw money without it being approved by your lender. This happens if you do not have an overdraft facility on an account or if you borrow more than has been approved. This can happen if you draw cash, make a debit card payment or if a direct debit or standing order goes out when there is not enough funds to cover the cost.
It is important to understand that the charges for these different types of overdraft varies. You will realise that when you go overdrawn you will have to pay interest and often fees for it. These will vary depending on your current account provider and it is always wise to know what yours are. If you use an unauthorised overdraft you will be charged a higher rate. Check out what this is as well and you will see why you should be extremely wary of using one of these.
Both types of overdraft can be expensive ways to borrow money. You will find that compared to some other types of loan, they are actually pretty dear. Therefore it can be worth considering other types of borrowing rather than an overdraft. If you need money for a short term, then it could be better to use a credit card and then pay the full balance back when you get the bill. This will be totally cost free and could be a great alternative. If you feel that it could be risky for you, that you might not pay it back or may go on a spending spree if you have a credit card, then it is wise to make sure that you consider a different option. You may also not have a credit card and not have the time to apply for one.
If you are aware that you are going to go overdrawn then it can be a good idea to stop and think before it happens. Consider whether you have an alternative. You might have some savings that you could use to prevent it or you may be able to delay the purchase until you have some more money. If you know that you have some money coming in soon and you are desperate to go overdrawn then you will be overdrawn for a small amount of time, it will be a lot cheaper than if you are overdrawn for a long period of time. It could be worth making sure that you keep a constant check on the balance of your current account in order that you can plan your spending and do your best not to get overdrawn.
Having an overdraft facility is a very useful thing. It can give you peace of mind knowing that you have a fund to fall back on should you be in an emergency and need the money. There are some people though that will see it as a fund of money that they can spend at any time. This is where trouble can start as it is not the way the overdraft is set up to be used. If you are overdrawn a lot then it can mean that you will have to pay a lot to your bank in interest and fees. That money could be better used buying things for yourself. Therefore it is best to try to only use it when really necessary. If you feel there is a risk that you will spend too much then do not have an overdraft or have a very small one.