Today's Guest Post is written by Sean Hamilton. Maori Millionaire is honored to have Mr. Hamilton here again. This is his 4th post. You Can see his other posts here:
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.
Steady as you go: Borrowing on Overdraft
Sean Hamilton
It’s probably inevitable that at some point in your life, you will need to borrow money. When you do, it is best to be as prepared beforehand, so you have greater understanding of what you’ll get into and how that will impact your wealth journey.
Borrowing money can be super helpful when you find yourself short of funds. Some of the time, it is absolutely necessary, such as when you buy a house or start a business. But those examples aside, it is best to borrow money sparingly and only when you absolutely must. This is because you’ll have to pay the money back, with interest. Unsecured debt (money borrowed without any asset or security against it) typically has a higher interest rate. The higher the interest rate, the more you may have to pay back.
One of the earliest forms of borrowing you may encounter is an overdraft. An overdraft is like a back-up facility loaded against your bank account. It usually has an agreed limit, set according to your ability to repay the lending. There are very strict rules in Aotearoa about lending money to people. If a bank or lender is caught breaking the rules, they can be fined a lot of money and disqualified from operating.
An overdraft is sometimes called a revolving facility. This means it doesn’t have any set repayment amount, and you can dip in and out of the agreed limit on your account. But not having a set repayment means you have to be disciplined when using it. It’s best to make sure you have regular amounts of money going into the account to pay back the overdraft. It’s important to do this to avoid paying as much interest as possible. Usually the interest on an overdraft is calculated based on the amount borrowed for each day the amount is overdrawn. Be aware that there are also fees associated with an overdraft.
Fees can include an application fee, monthly account fees, assessment fees, and more. These can vary widely depending on the lender, but have to be set in line with the same rules and laws mentioned earlier. It’s always best to check the fine print in the Terms and Conditions about fees and interest for any lending arrangement you agree to. If you have doubt about understanding the lending contract, seek help. As a minimum, ask the lender to explain the details better, or check in with friends and family, or a financial adviser before borrowing.
An overdraft is usually accessed in the same way your everyday bank account is. You would use your debit card, or you can take out cash, up to the agreed limit. You can also check on the overdrawn amount, via bank apps and internet banking platforms.
Lending is there to help, in certain situations, so don’t leave it until the last minute, but be prepared ahead of time. Contact your bank or lender of choice and ask about the options available to meet your particular situation. Once set up, the overdraft can help you when you might be a little short in your pay cycle and need to top up for gas or groceries before that next pay day. Then when your pay comes in, it pays off the amount borrowed.
I acknowledge, there will be times when you must borrow and it isn’t an ideal situation. However, from experience, if you don’t have a plan on how to repay that money, you can end up in a debt trap. This is a nasty cycle of never paying more than the interest owed on the borrowed amount, thus never getting rid of the lending facility. In turn, not having the ability to repay the lending can hurt your credit score and future prospects with financial institutions, telecommunications companies and other retailers. All of which stifles your way to generating wealth and securing your future.
An overdraft can also be a like an emergency fund, for those unexpected bills and situations. We don’t know what’s around the corner in life, so having an ability to cover those unknowns can be important. This is especially true if you don’t have a savings emergency fund. If you can get ahead of the game by setting up regular savings to draw on in times of emergency, this is a better way to maintain your wealth journey. The reason for this, is that you use your own money first, and in turn, you don’t have borrow money and pay interest and fees.
Overdrafts are typically one of the first types of lending products that people interact with from a bank. There are other types, and the next article will explore credit cards. These tools can be very helpful, even rewarding when used properly, but like all borrowing, must be used with discretion.
Nga mihi.
Sean Hamilton
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.