At the end of last year, BROTESTE made a study that pointed out that Brazilians were paying one of the highest interest rates in the world. At the time, the entity compared the rates that were charged on revolving credit cards in eight countries and came to this conclusion. The fact is that overdraft is not much different. At high rates, a debt on this asset could quadruple in one year.
Attention with the overdraft!
Although the rules for overdraft should change from July, the interest rates of this type of credit still exceed 320% per year. So beware of this villain of your financial health.
Due to the high interest rates, its use is recommended only in emergency situations, and also when you are aware that you will be able to pay the overdraft amount in the short term. Otherwise, you could easily lose control and not be able to repay the rapidly growing debt. Many are unaware of compound interest, but most importantly be aware that they make debt grow rapidly.
Let’s exemplify to make it easier. Let’s say you used $ 1,000 from your overdraft in January. Assuming a monthly interest rate of 10%, a month from now, in February, your debt will be $ 1,000 + $ 100 = $ 1,100. In March, many may think that it will have an increase of $ 100.00, which will leave the debt in the total of $ 1,200.00. Unfortunately that is not how it works. Your debt updated in March will be $ 110.00 (10% compared to February debt).
If in one year you are not paying this debt, besides having your name negated, it will cease to be $ 1000 and will become $ 3,138.00.
A customer’s overdraft limit is based on their relationship with the bank and their financial movements. It works as a pre-approved loan for emergency situations.
Credit Card Debts
But not only the overdraft is villain. As we have already seen, having credit card debt is not a good idea. Quickly interest rates cause the outstanding balance to grow a lot. The truth is that both can disrupt your financial health.
What is the highest interest, card or overdraft?
But after all, what interest is the largest overdraft or credit card? Credit card interest is generally more expensive than overdraft interest, averaging 400% per year. However, it is always necessary to review the conditions offered by your bank and card administrator.
Difference Between Personal Credit And Overdraft
Personal credit is nothing more than a loan. To achieve this the customer goes through a credit analysis and only after approved receive it. For this reason, your interest is lower than overdraft, credit that the customer receives without going through the analysis.
As with overdraft the risk to the bank is higher as it does not take into account the client’s current financial health, more interest is charged. In personal credit there is more bureaucracy and selection, but this guarantees a better opportunity for those who are able to get a loan because it has a clean name and good income.
Some people end up using overdraft because they are ashamed to go to their bank manager to check credit options, for example. An alternative to this is to do online loan simulation .
Overdraft or personal loan?
If you have an outstanding debt, have you considered transferring it? Debt transfer is an exchange in which you replace a larger expense with a smaller one. It is advantageous when existing debt has high interest rates. In these situations, debt transfer is helpful as you could significantly lower costs. One way to achieve this may be by means of a loan, in which the amount taken can amortize or settle the account. At LoanCo, for example, the CET (Total Effective Cost) rate of the personal loan starts at 2.97% per month, which means 42.8% per year.
When is the overdraft worth using?
Some banks offer the option of using overdraft for a few days without paying interest for it. If this is your case, you can opt for this solution. However, you need to be very careful, because if you pass the period you will have to pay the full interest rates.