If you need a small amount of cash and are thinking about getting a loan, perhaps you should first look at the option of an overdraft facility. An overdraft can act like a short-term loan, and is usually charged at a fairly good rate. If you are unsure whether or not a loan or overdraft would be better in your situation, then here are some tips to help you.

What is an overdraft?

An overdraft is a service provided by your bank that allows you to spend money over and above the amount you have in your account. The overdraft is a form of credit that effectively attracts interest charges for the length of the time you are overdrawn. Overdrafts can help you to maintain your cash flow even when you are running short of money.

Benefits of an overdraft

There are benefits to an overdraft, which can make them more useful than loans in some circumstances. If you simply require a little extra money that you will be able to pay back fairly soon, then an overdraft is better than a loan. Also, some banks are starting to offer interest-free overdrafts for a certain period, meaning that you can take out credit without having to pay anything. Also, there is no definite time limit on when you need to pay back your overdraft, so it can be more flexible than a loan.

Disadvantages of an overdraft

Although overdrafts can be very useful, they do have some drawbacks as well. If you cannot get an interest-free overdraft, then the amount you are charged in interest is likely to be higher than a loan. Also, you cannot borrow as much with an overdraft as you might be able to with a loan, and overdrafts are not good for long-term borrowing. Further, if you go over your overdraft limit, you will find yourself being charged penalty fees, as well as a much higher rate of interest. Finally, overdrafts do not give you the security of a loan, because the bank can demand you repay the full overdraft at any time.

Loan or overdraft?

You should use both loans and overdrafts to help you maintain good cash flow. Having an overdraft facility on your bank account is very useful in times of emergency, or when you unexpectedly need to spend a little more money than usual. However, for larger purchases that you want to pay back more slowly, a loan is the better option. Also, loans can have fixed rates, meaning you can budget the cost of the loan more easily than a variable rate overdraft. If you want short-term flexibility and convenience, then an overdraft is right for you. However, if you want to borrow larger amounts of money and pay them back steadily over a period of time, then go for a bank loan.