09 May 2018: If you are considering applying for an overdraft, but aren’t really sure how it works, there are important questions you should ask your bank, to ensure you are making the right decision.
Ryan Prozesky, FNB Consumer Core Banking CEO, says an overdraft is an important credit facility to help you manage your personal cash flow in the event that your bank account runs out of funds.
“It can come in handy to ensure that important debit orders, such as a home loan or insurance premiums, are always honoured, when you use up all the funds in your cheque account, due to unforeseen expenses,” says Prozesky.
He addresses key questions that consumers should ask about an overdraft facility:
- Do you qualify by default as a cheque account holder? – the approval of an overdraft facility is subject to an affordability and credit assessment. The assessment determines whether the bank approves the application, as well as the size of the credit limit.
However, banks often pre-approve selected customers with a good credit profile to make it easier for them to access the overdraft facility. For example, FNB allows pre-approved customers to conveniently take out an overdraft without the need for paperwork through Online Banking, the FNB Banking App, Cellphone Banking and ATMs.
- Will I need a separate account? – the facility is linked to your cheque account, meaning that you do not need to track or manage the overdraft in a separate account.
- When do I start paying interest – you will only start paying interest from the time you start using the facility. The interest will only be charged on the amount you have used.
Furthermore, the interest rate is personalised based on your individual credit profile.
- How do I pay for the amount I owe – the balance you owe will be reduced whenever your salary is paid into your bank account. However, the balance increases as you use the facility.
- Can I settle my overdraft earlier – when you deposit funds into your account the bank will deduct the amount you owe as well as the interest due.
- What happens if I no longer earn a salary – consumers can take out credit insurance to cover the debt, in the unfortunate event that anything happens to them.
For example, FNB offers an Overdraft Debt Protection plan which covers your outstanding balance in the event of death or permanent disability and your minimum instalments for up to 12 months in the event of temporary disability or unemployment/inability to earn an income.
Customers who fall into financial difficulty are encouraged to contact their bank to make a suitable repayment arrangement. Many banks have the ability to gradually reduce your overdraft limit overtime to help structure a repayment plan.
“With any form or credit, the onus falls on the consumers to use it responsibly and always ensure that their financial commitments are honoured on time, to avoid being heavily indebted and eventually hampering their credit profile,” concludes Prozesky.