Overdraft v Guarantor Loan – Who is the Winner?

Did you know that dipping into your overdraft can ultimately prove to be just as costly as taking out a payday loan?

Overdrafts, the Overview

eeFor those who may not be familiar with the concept of the overdraft – overdrafts occur when money is taken from an account that reduces the balance to less than zero, causing a ‘debit balance’. When this situation occurs, the account is said to be “overdrawn”. Assuming the bank has granted prior permission to do this, the account holder will be charged a rate of pre-agreed interest on the overdrawn balance. If however the overdrawn balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Example

You make a payment from your account which takes you into an unauthorised overdraft by less than £10, and you are overdrawn for one day during the month.

For example, if you have a £250 interest-free overdraft and you make a payment which takes you beyond this authorised overdraft you will be charged the £25 monthly unauthorised overdraft usage fee.

Surprising Results

Upon the completion of a recent survey, Which? Executive director Richard Lloyd stated that: “Whilst the Government and regulators have rightly focused on the scandal of payday lending, but they must not lose sight of the urgent need to clean up the whole of the credit market. High street bank overdraft fees can be just as eye-watering as payday loans.”

http://www.telegraph.co.uk/finance/personalfinance/borrowing/10376952/Bank-overdrafts-as-expensive-as-payday-loans.html

Expensive Charges

Which? found customers borrowing £100 over one month with Halifax within an agreed overdraft would be charged £30 for the period giving an effective annual percentage rate of 356%, while Santander customers were charged £20.

Borrowing the exact same amount for the exact same period with a two well known payday lenders would cost £20 and £37 respectively.

Shock To The System

Whilst the high APRs associated with payday loans have been well documented over recent months, the cost of going into an overdraft may come as a surprise to many people.

Although a number of banks have reportedly reviewed their overdraft charging structures, resulting in a move to a daily fee rather than the traditional annual percentage rate, this has not been enough to quell the argument from consumer campaigners who have long argued daily fees are more expensive and have been used to hide a hike in the real interest rate customers are paying to borrow money.

For more information regarding overdrafts and how they work please click here.

What is the Alternative?

It is rare for someone to actively choose to enter their overdraft. Typically they are used for emergency situations or as a means to tide people over until their next payday. However if this becomes a recurring theme, the need to find a cheaper alternative offering a longer lasting solution will become increasingly important.

One option which is currently rising in popularity is called the guarantor loan and offers a combination of a quick fix and the ability to have a lasting positive effect on your finances.

Unique in the Market Place

Guarantor loans are unique in that rather than the borrower being subjected to the credit check during the application process, it is the credit-worthiness of the guarantor that is utmost in the mind of the lender.

This is not to say that they lend irresponsibly though, lenders still have criteria in place to ensure that they lend responsibly, the borrower will need to demonstrate their ability to repay the loan in order for the application to be successful.

Fixed Rates

Available up to £10,000 and repayable over 5 years, guarantor loans are typically granted with a fixed APR of approximately 50%, ensuring the borrower is in constant control over exactly how much they will need to repay each month. This makes for easy budgeting

As with all personal loans, guarantor loans can be used for a variety of purposes whether that’s debt consolidation, wedding planning, holidays, paying deposits or helping to pay for expensive young driver insurance.

Because they are available in such significant amounts, they allow the borrower to get a firm grip on wavering finances by offering a highly effective debt consolidation tool.

Clamping Down on Irresponsible Lending

As the government quest to clamp down on excessive charges and irresponsible lending continues, guarantor loans offer a very effective method of ensuring that borrowers are being treated fairly whilst making sure that they remain in control of their finances without being charged exorbitant rates to do so.

Bio – Amanda Gillam

I work as a blog writer for a finance company called www.solution-loans.co.uk which specialises in Guarantor Loans. I hold a degree in financial management and enjoy writing about a variety of topics including finance, transport, travel, sport and business.

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