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Is an overdraft better than a loan?

Over the last decade it seems as though banking customers in the UK have literally been force fed their own overdraft with interest free buffer zones looking like money for nothing. However, slowly but surely we all seem to increase our overdraft bit by bit until what is really a short term financing instrument can often eat up a large part of your monthly income. So what is better, an overdraft or a loan?

Loans are longer term structured arrangements which will see you receive an agreed amount up front in return for paying back an agreed monthly figure for a set period of time. Normally the loan is not flexible so the funds you receive on day one will not be increased. This type of finance is very useful for long term planning but should not be used as an excuse to overspend in the future.

Overdrafts on the other hand often attract a much higher rate of interest after you leave the interest free buffer zone and if you actually go over your agreed overdraft limit the charges can be excessive to say the least. Do not treat an overdraft as your personal piggy bank as it should only be used for short term funding requirements and not long term financing.

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