Understanding Overdraft vs Personal Loans

Overdraft

• Interest is only charged on the outstanding amount
• Can be paid off without penalties
• Can be prearranged and only used when needed
• Provides a short term solution for cash flow issues
• Interest charges are often high
• Additional charges for going over a pre-arranged limit are high
• Not the cheapest form of borrowing
• Ease of access could encourage overspending

Personal Loans

• Regular, pre-agreed payments make budgeting easier
• Generally only issued to individuals who can prove their ability to make repayments
• Useful for purchasing medium to high-value items, like a car or home improvement
• May be secured against an asset, leading to potential loss of the asset if repayments are missed
• Not suitable for short-term loans

Hire Purchase

• Spreads the cost of an expensive item over a period of time
• Credit is secured against a specific item
• Allows a customer to afford something now that they might not be able to afford otherwise
• Interest charges may be higher than other traditional loans
• Ownership of the asset may be kept by the seller until the final payment is made
• Agreements can be manipulated to make a purchase seem deceptively appealing

Mortgages

• Spreads the cost of expensive items over a long period of time, like a house over 25 years
• Interest rates can be fixed or tracked, reducing the risk of fluctuations
• Interest payments can vary, affecting a borrower's ability to repay or meet other expenses
• Failure to meet repayments can lead to a loss of a home and affect a person's credit rating
• Penalties may be applied to early repayment

Credit Cards

• Credit card holders can pay above the minimum rate to speed up repayment and reduce interest
• Can be used for items of multiple sizes and value to a limit without needing to secure against an asset
• Provides some protection on purchases
• Can encourage overspending, sometimes on unnecessary purchases, and can lead to debt problems
• Interest rates are often higher than on a personal loan

Payday Loans

• Help solve immediate short term cash flow problems
• Relatively easy to secure
• Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control