Deciding on the best method of credit can be tricky. The current hike in the repo rate, and escalating fuel and food costs mean many people are just not making ends meet and have to resort to a loans or overdrafts.
Personal loans are popular, but overdrafts also have advantages.
So, which is the best option?
Loans and overdrafts both have their advantages and disadvantages, but the way to answer this question is almost entirely dependent on why you need the credit. It is definitely good to know about both, so that you can identify the optimal moment to use one over the other.
So, for example, if you need extra money because you are running short before month end or have to cover unexpected payments, then an overdraft is the best option. If, on the other hand, you want to pay for a major car repair or home renovations, a personal loan is a better choice.
An overdraft is useful for individuals or small businesses with cash flow problems. An overdraft is a credit agreement made with a bank that allows an account holder to use or withdraw more money than what they have in their account (to go “overdrawn”) up to an approved limit.
The customer must have a transactional account at the bank, like the African Bank MyWorld account. It is easy to apply for an overdraft and, if it is approved, the facility is activated when your account is topped up with your salary. There is no repayment term and you only pay interest on the amount you borrow.
A personal loan is a fixed amount borrowed over a period that needs to be paid back in monthly instalments. Interest is charged on the amount you borrow. Monthly payments are fixed, which makes repayments easy.
It is best to view an overdraft as a form of short-term and occasional credit; so not a facility you dip into too often during the month. This can lead to debt and unnecessary stress about paying the money back. An overdraft needs to be managed alongside a budget and requires good financial discipline.
An overdraft is entirely at the bank’s discretion and your creditworthiness will be assessed by the bank when you apply for the overdraft, taking factors like your age, earnings and credit rating into account. Based on the outcome of the application, you will be offered a personally-tailored overdraft facility.
Before applying for a loan or overdraft, consumers need to check the status of their credit report, as this affects the ability to apply for credit. African Bank offers all South Africans a free credit report every month. Simply register for online banking on their website (www.africanbank.co.za) or download the African Bank app to get a free credit report.
In conclusion, remember the ability to pay any form of credit back is the most important consideration before deciding which suits your needs better.
Brought to you by African Bank.