How to Manage Your Overdraft
As a student, financial life will almost certainly be something of a struggle. Even if you are eligible for, and receive, the full amounts available in state finance, you are still likely to find that you are perpetually short of cash.
Another article in this section outlines some of the private finance options available to you. The most popular of these is almost certainly the student overdraft, and with good reason: unlike a loan, you only pay interest on the sum you are actually using; and, indeed, most banks now offer 0% deals for the duration of your studies.
Not Free Money…You may well see what appear to be very enticing offers from banks encouraging you to open a student account with them. If you have a 0% overdraft, it is easy to get into bad borrowing habits. The key to successfully managing your overdraft is to constantly remember that this facility is not a gift; you will eventually have to pay back the money that you have borrowed.
It is very unlikely that you will be able to make repayments on your overdraft while you are in education; indeed, if you were able to do that it would seem to make more sense to have a smaller overdraft and spend the cash that you have instead. In any case, you are likely to have a sizeable amount owing on your overdraft once you finish your course - anything up to around £3,000, in fact.
Once you are no longer a full-time student, you will immediately begin paying interest on this sum, probably at a rate of around 15%. Depending on your arrangement, this will be debited either daily or monthly from your account. This immediately poses problems: if you have borrowed the maximum sum on your overdraft facility, interest payments may push you into what is known as an unauthorised overdraft. This means that you are borrowing more money than you have arranged with your bank, and you will be heavily penalised for this. If you find yourself being charged a penalty for exceeding your authorised overdraft, you should read the article on penalty charges elsewhere on this site as you can claim them back.
However, the best way to avoid them is not to get into a position in which you can be charged in the first place. As a result, if you are borrowing your maximum authorised limit, you should contact your bank when your course finishes and try to negotiate a larger limit.
Personal LoansWhile you are still in full-time education, an overdraft is almost certainly the cheapest way to borrow - probably free, in fact. Many students, however, are forced to find jobs in order to pay back some of the money that they owe before the course ends, in order to minimise the amount on which they will be paying interest. This may not be practical, however, particularly towards the end of your final year when academic pressures are most intense. In these instances, you may consider applying for a personal loan to write off your overdraft. If you have a sound credit score you could get a loan with a rate of as little as 5% - considerably less than you are likely to be paying on your overdraft.
You should remember, however, that you will have to make monthly repayments on your loan, so this is only really possible for those who have regular income at the end of their course.