Times are tough. It feels like the Rand is hitting an “all time low” every second day and people everywhere are turning into real penny pinchers. While many prominent South African economists like Dawie Roodt have advised us not to panic, but to rather be cautious in our spending, it’s human nature to start looking at your options and to make backup plans, right?

And what greater backup plan is there than adding an overdraft to your current account? Since it is already the most popular way that small and medium businesses borrow money, adding an overdraft is a practical option to consider in case of emergency.

What is an overdraft?

An overdraft is a short-term lending solution that allows you to continue withdrawing money from your bank account even when the  balance is at zero. In other words, when you have an overdraft solution linked to your current account, you have the option of withdrawing a pre-agreed, set amount of funds in addition to whatever is already in the account. An added bonus is that with an overdraft added to your account, your bank will cover some cheques or debit orders that would otherwise have bounced.

What we love about overdrafts

No more turning to friends or family when you’re in a pinch. In fact, once you have added the overdraft solution to your account, you won’t even need to fill in forms or apply for a loan. Nope, all the paperwork is completed upon adding the solution to your current account. This means that you can simply withdraw as much, or as little, of the overdraft limit whenever and wherever you need to and it’s completely at your discretion. Best of all? The money is immediately available when you need it.

What we loath about overdrafts

Besides the fact that the usual bank charges apply, such as a once-off activation fee and interest on the loan, we’re ever so slightly worried about the temptation that is part and parcel of having an overdraft facility. In fact, some of the members of the Moneyshop team joke and say that knowing that you have an overdraft facility at your disposal is similar to placing your favourite chocolate slab on the kitchen counter and then trying not to give in to temptation and eat the whole thing.

If you are one of those seriously self-disciplined people who can just break off and enjoy one block of chocolate at a time, then great, you’ll probably manage your overdraft facility really well. If, however, you are a bit more over indulgent, you could start using your overdraft facility more than you should; simply because you can.

A couple of key points worth remembering include:

  • There is generally a monthly fee linked to having an overdraft
  • Most banks have a minimum monthly salary requirement
  • An overdraft can only be added once you have an account at a bank
  • There are no minimum monthly repayments as long as deposits keep being made into that account monthly