Overdraft

An overdraft lets you keep spending past a zero balance up to an agreed limit. Interest accrues only on the amount actually used, and depositing money immediately reduces the balance being charged.

The advantage is paying only when you use it. Open a 50,000 limit and draw 1,000, and you pay interest on 1,000. That makes it a reasonable facility to keep available for emergencies.

The danger is psychological. Cards keep working while the balance is negative, so the sense of being in debt fades. It feels like money is in the account, and spending tends to rise.

Rates are also higher than on ordinary personal loans — the price of instant availability. For money needed over a long period, switching to a standard loan costs less interest.

Merely having the limit open affects other loan applications, since it counts as debt you could draw at any moment. If a mortgage application is coming, closing it in advance is worthwhile.