As the economic squeeze continues to tighten on the UK consumer more and more people are experiencing what they hope will be short term financial problems. This has prompted many consumers to look at ways to help them through these difficulties with loans and overdrafts by far and away the most popular products at the moment. So should you go for a loan or an overdraft?

The key to any financial planning is the bigger picture rather than just finding a short term solution to what could turn into a long term problem. If you are experiencing difficulties at the moment you need to be realistic, you need to be sensible and you need to ensure that the product which you choose is the best option for you. We hereby list some pros and cons for overdrafts and loans :-

Loans

Pros

A fixed loan will ensure that your payments remain constant and you know exactly what is required, when it is required and you can actually see the end picture – the full repayment of the loan.

In general the loan market in the UK is very flexible and normally you will be able to choose the length of the loan period to fit in with your personal situation.

Cons

Many loans will have fairly hefty late payment charges if you either miss you payment date or fall into further financial difficulties. Do not rely on the recent trend of reclaiming charges to cover you if you are charged in the future.

While the trend towards setup charges for loans has diminished as competition has increased, some lenders will still charge you some form of fee for setting up and agreeing the arrangement. You also need to be very wary of companies who require money up front before they agree a loan because very often the loan application will be turned down and you will have lost your money.

Overdrafts

Pros

Overdrafts are a lot more flexible than loans in that you can take out and repay money at your own discretion as long as you do not go over your agreed limit.

Very often an overdraft will be agreed quicker than a loan if you have banked with one company for a number of years. You may also receive a ”free overdraft” facility whereby you are not charged interest on the first £100 you go overdrawn.

Cons

Sometimes overdrafts can be too easy and too accessible with many people suddenly using their overdraft as an extension of their income and adding the facility into their everyday figures.

It can be very easy to use your overdraft facility without actually repaying money and very quickly find yourself up to your limit and probably in more financial trouble than you were when you applied for the overdraft!

If you exceed your overdraft facility you can find yourself on the end of some fairly hefty interest charges, and quickly getting deeper and deeper into trouble.

Summary

While there is no right and wrong option many people find the structure of a loan more favourable with regards to their financial planning, although those who have the discipline to stay within their limits and make repayments might find an overdraft is a better option. Either way it is essential that you know the pros and cons for each product and the implications for your financial well being.

As the banks continue to try and increase their fee income, more and more consumers are complaining about increased overdraft charges.  While everything is now legal and above board, many are still receiving a shock when they open up their bank statements.  As the economy moves downwards and money becomes tighter we will see more people double checking their statements!

So what can you do to reduce the total overdraft charge which appears on your statement? Did you know that many banks will give you a free overdraft – up to a certain limit – if you actually ask them?

The subject of overdraft fees is something which has caused major concerns over the last couple of years, and the banks are now very keen to get their fee structures back on track.  They have been advised that their fees should be more transparent, easier to understand and above all the fee should fit the service. 

Do you depend on your overdraft?

It seems that more and more people actually depend on their overdrafts to see them through each month, especially with Christmas fast approaching.   While a £5 fee per month on your overdraft may not seem an awful lot, when you consider you may be paying £60 for the year, on an overdraft which may be just a few of hundred pounds – does it really seem that economical?

For those with a regular income, and an overdraft which rarely goes over a certain limit, it may well be more worthwhile taking out a short term loan to pay off the overdraft.  The interest rate on the loan would be no where near the effective rate on your overdraft, so you would benefit from a more structured debt repayment plan, as well as reduced interest charges.  Now I bet the banks did not suggest that to you?

As we move towards a decline in worldwide business activity, a time when interest rates around the world will fall, many are starting to ask when they should consider re-financing their debts.  Is it time to do it now, or wait as long as possible?

While it may be tempting to take advantage of the recent reduction in interest rates in some areas of the world, those who can may well benefit from waiting a few months longer.  The UK for one is expected to see interest rates start to decline very soon, with recent indications by the Bank of England seemingly confirming this.  We are also in a situation where finance is still more expensive in real terms than it was 6 months ago, because there is less liquidity in markets, which has pushed money market lending rates higher.

If you are looking for a fixed rate refinancing of your debt, and you are able to hold on for a little longer without impacting upon your credit rating, it may well be beneficial to hold off any action for a little while.  We could see UK rates fall by more than one percentage point over the next 12 to 18 months, depending upon the performance f the economy.  Even this relatively small fall will offer many consumers, who have built up substantial debts, the chance to reduce their future debt repayments.

Each person’s situation will be different and there is no simple answer to the question, but it seems inevitable that the UK, US and other major countries around the world will be seeing lower interest rates in the not too distant future.

In a surprise move ahead of the test case hearing in January 2008, the OFT have come out and publically rejected the Banking Sectors arguments with regards to overdraft charges and the like – the payments at the centre of the overcharging situation which has been rumbling on for some time.

This is actually a huge body blow for the Banks, who have already paid out a staggering £570 million to disgruntled customers on a no blame basis.  The banks claim that the overdraft charges in question are actually used to fund their all round customer services, and as such they should not be covered by the rules being used to take them to court.  The OFT strongly disagree with this idea and have dismissed the argument out of hand.

We are not even at the steps of the Court yet and the two parties are starting to crank up the pressure in what promises to be an explosive court case.  There is even speculation that the banks may actually settle out of court in order to prevent a whole host of their charging measures being presented to the public.  While legally the banks have not accepted any blame for the £570 million of payments already agreed, morally they have severely weakened their case.

The only problem for the UK banking customer is the fact that whatever is taken off the banks if they lose, they will need to recoup somewhere else, whether by reduced savings rates, increased charges or some similar income producing action.  There is no way that the banks will handover what could add up to billions of pounds and let the customer off the hook.  Keep a very close eye on this, as it is only now just beginning to simmer nicely!

In this world of instant finance, it seems that everyone is in debt, but where did it all come from? When did it all start? And we are not talking about mortgages! 

Over the last 20 years we have seen a gradual increase in personal debt all over the world, and while many people are having trouble financing some of their debts, it seems to be on the up and up.  When you consider that one of the recent growth markets in the finance industry was advice on Bankruptcy and Individual Voluntary Arrangements (before the rules changed), you may well get the picture.

So how far back can we trace the build up of debt, and who’s fault is it?

While it has always been easy to obtain debt for the masses, whether via credit cards, loans, etc it seems that many people joined the slippery slope with such a simple thing as an interest free overdraft.  These have been dished out by the banks to almost any customer which they have come across, in the knowledge that it can lead to many more lucrative sales. 

We have seen massive increases in overdrafts which incur a monthly charge as well as an interest payment.  Many of these will lead to personal loans when they get out of hand, or even push the customer towards the credit card market.  Once they are in the clutches of the credit card industry, the ease with which a card can be used seems to appeal to the masses.  Slowly but surely larger and larger amounts are left unpaid at the end of each month, as slowly but surely the interest payments rise.

When people are in employment they are very often able to service their debts at a struggle, but with the property market showing signs of cracking, and the economy set to fall back next year, the UK consumer may be about to hit the buffers.  There have been numerous calls for debt to be curbed but the banks just keep releasing offer after offer and offer. 

Judgement day is coming for many, and while the banks will squeeze as much out of you as possible, the customer will be the one who suffers most, with their credit rating tarnished forever, and worse.  However, at the end of the day, it is for the consumer to say no, to look at their finances and see that trouble is brewing, but as they say “its easy to make hay while the sun is shining”. 

As if the UK debt situation was not bad enough, with more and more people struggling to cover their monthly mortgage payments, it seems that many of the UK’s gamblers are using debt to fund their habits.  A survey by one of the leading money sites on the internet has unearthed evidence that one in eight of the UK’s gamblers use credit cards, overdrafts or bank loans to fund their habits.  How hs this happened?

It seems that the increase in the number of online gambling sites has led to a new breed of gambler, the home based player.  Twice as many online gamblers are using debt than those who use the more traditional bookmakers shops, a figure which again highlights the potential dangers of uncontrolled online gambling.  If the results of the 2000 people survey were replicated for the overall UK population, this would indicate a hardcore of 1 million plus gamblers, 75% male and 25% ladies.

There is no doubt that online gambling has opened up a whole new market, which is attracting a whole new style of gambler.  Increased credit facilities and more and more adverts about gambling sites are starting to take their toll, with associations such as Gamblers Anonymous and the like experiencing a large increase in problem cases.

The UK has one of the most tightly controlled gambling industries in the world, although it has proved difficult to regulate overseas websites which are out of the control of the UK authorities.  The US have attempted to curb this problem by attacking the online payment companies, a move which while highly controversial has had the desired effect.  Are the UK gambling laws about to turn full circle? Or is it full steam ahead for more casinos and  opportunities to gamble?

Over the last few years overdrafts have become very much a normal way of life for many people in the UK, something to fall back on in times of need, but should they really be a part of every day financial planning?

As competition hots up in the financial industry it has never been easier to get an overdraft, banks are literally giving them away as soon as you open an account. While many people are often attracted by the small “buffer” zone which is interest free, they tend to forget that the interest rate on overdrafts (not to mention the monthly fees which many banks charge for the service) can be fairly high.

Other aspects to consider about an overdraft include :-

· The majority of people who have an overdraft will use it at some stage EVERY month.

· Check your monthly overdraft charges each month - interest and monthly fee - and you will be surprised how high it actually is.

· If you are constantly into your overdraft each month, that may restrict your opportunity to move elsewhere, and take advantage of other offers in the sector.

· Overdrafts are repayable on demand - as soon as you hit any kind of financial trouble, watch the banks withdraw the service. For some this can be the beginning of serious financial troubles, with a major knock on effect.

Unfortunately for many, the chance to spend their overdraft can often be too tempting and can lead to further over spending.  This can then lead to extended overdrafts which they have little opportunity to actually repay, and possibly new loans, etc.

Surprising as it may sound, for those who make constant use of their overdraft facility, a loan may often be a more sensible option.  A loan offers a more structured repayment plan, a small amount each month going to pay off the debt, and very often the interest rate will be less than the cost of an overdraft.

To make the most out of any borrowing facility, it is essential that you have a structured repayment plan.