width="138"><SPAN class="ARTICLEMENUHEAD">C O N T E N T<br><SPAN CLASS=ARTICLEMENULINE>_______________ </SPAN><br><SPAN CLASS=ARTICLEMENUITEM><A HREF=#1 target=_self>Why Borrow from a Bank? </A></SPAN><br><SPAN CLASS=ARTICLEMENUITEM><A HREF=#2 target=_self>Bank Loans and Overdrafts </A></SPAN><br><SPAN CLASS=ARTICLEMENUITEM><A HREF=#3 target=_self>Arranging Borrowing </A></SPAN><br><SPAN CLASS=ARTICLEMENUITEM><A HREF=#4 target=_self>Which Is Best for You? </A></SPAN></SPAN><SPAN CLASS=ADVISORCELL><p><SPAN CLASS=FYI>Expert</SPAN><BR><SPAN CLASS=ADVISOR>A s s i s t a n t<BR> </SPAN><BR><SPAN CLASS=ADVISORTEXT>
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<p><SPAN CLASS=ARTICLESUBHEADS><a name=1>Why Borrow from a Bank?</a></SPAN><BR>
People borrow when more money is required than they have available and from a bank for different types of lending to suit varying needs. Borrowing is often the choice when there are insufficient funds for a planned expenditure, when an unplanned expense arises, or when the borrower does not wish to tie up too much of their cash in difficult-to-realise assets. Whatever the reason for borrowing, banks have two principal lending vehicles for non-property expenditure: loans and overdrafts.</P>
<p><SPAN CLASS=ARTICLESUBHEADS><a name=2>Bank Loans and Overdrafts</a></SPAN><br>A bank loan is a sum borrowed from your bank and repaid, with interest charges, by instalments over an agreed time. You will need to be 18 years old or over and to show that you can repay the loan. The funds can be used for any legal purpose but the bank will wish to know your intentions. Interest is charged because the bank will be lending you money that other customers have deposited and on which the bank itself has to pay interest plus a contribution to profit.<BR>
An overdraft is a banking service allowing you to continue to draw on your account even though there are insufficient funds available. It is a form of credit but the amount is variable and interest is charged during the periods when your account is overdrawn. Overdrafts are not usually to fund a purchase (a loan will be more suitable for that) but can smooth cash flow if your income arrives later than your outgoings. Unauthorised overdrafts can arise when, say, guaranteed cheques arrive at the bank although the account has insufficient funds to cover them. The bank will pay but may charge a higher rate of interest than for an authorised overdraft, partly as a penalty and partly to reflect the additional risk. There will usually be a daily administration fee plus a charge for any letters that have to be sent to warn you of the situation, and non-guaranteed payments, including direct debits and standing orders, may not be paid.<BR>
Authorised overdrafts have to be negotiated with the bank, preferably in advance of any requirement, and are expressed as a limit on the account for an agreed time. As long as drawings on the account do not take it beyond the agreed limit (it will then become unauthorised) all drawings will be honoured. Interest will be payable on the amounts overdrawn but not while the account is in credit, and usually at a lower rate than where the overdraft is unauthorised.<BR>
Different banks have different charging structures for overdrafts but some common ones are:</P>
<LI>A monthly management fee </LI>
<LI>A charge on the overdrawn balance </LI>
<LI>A charge for each transaction while the overdraft is in use.</LI>
<P>Before the charges are debited to your account, your bank is obliged by the Banking Code to tell you what will be charged, when and how it is made up.<BR>
In summary, an overdraft is designed to cover short-term cash shortages; it is flexible but not suitable over a long period of time. Also, the bank has the right, at any time, to withdraw the facility and demand immediate repayment.</P>
</SPAN></td></tr><tr><td align=center valign=top><table border=0 cellpadding=0 cellspacing=0 width=138><tr><td align=right valign=top width=138><A HREF=#top TARGET=_self><SPAN CLASS=SIDEBARHEADS><SPAN CLASS=ARROW>ß<!--up arrow--></SPAN> B A C K </SPAN><BR><SPAN CLASS=SIDEBARLINE>_____________ </SPAN><BR><SPAN CLASS=SIDEBARLINK>to the top </A></SPAN></td></tr></table></td><td align=left valign=top><SPAN CLASS=ARTICLE><p><SPAN CLASS=ARTICLESUBHEADS><a name=3>Arranging Borrowing</a></SPAN><br>Although you may still go to discuss your needs with a manager or lending officer at your bank branch, bank loan applications are increasingly handled by post or over the telephone. You may also care to shop around for the best deal as a bank loan does not have to be from the bank with which you have your other accounts. The application will require the usual personal information including details of your income and regular expenditure so that the bank can assess your ability to repay. The term of the loan, usually one to five years, will reflect your needs plus the bank's assessment of your future prospects. The bank may also check your past credit record and the application usually includes your authority for that. A court case or other problem will not automatically disqualify you from a loan but be honest and explain at the outset the circumstances in which any problems arose. Banks use a credit scoring system to determine whether to grant a loan and, if you are refused, the bank should explain why and must tell you the details of any credit reference agency whose data may have influenced the decision. (See <SPAN CLASS=ArtikelLink><A HREF="money:navigate/guide/guide/003002.html">Understanding Credit Ratings</A></SPAN> and <SPAN CLASS=ArtikelLink><A HREF="money:navigate/guide/guide/003003.html">What to Do if the Credit Rating Is Wrong</A></SPAN>.) If a loan is for a large amount or if the bank judges the risk higher than usual, you may be asked to offer security, usually a charge on your house. Remember, though, that your home will be at risk if you fail to meet the repayments for a loan or mortgage secured on it.<BR>
Arranging an overdraft often entails little more than a telephone call to the bank manager or lending officer. If you believe that there are likely to be insufficient funds available, contact your bank as far ahead of the need as is possible. Sometimes, if you are looking to arrange an overdraft to smooth the cash flow in a small business, the bank will want to see financial records before deciding. The basis for the decision is similar to that for a bank loan. <BR>
Whenever your bank arranges borrowing for you, there may be a charge which will often be higher for an overdraft because the facility is tailor-made rather than standard.</P>
</SPAN></td></tr><tr><td align=center valign=top><table border=0 cellpadding=0 cellspacing=0 width=138><tr><td align=right valign=top width=138><A HREF=#top TARGET=_self><SPAN CLASS=SIDEBARHEADS><SPAN CLASS=ARROW>ß<!--up arrow--></SPAN> B A C K </SPAN><BR><SPAN CLASS=SIDEBARLINE>_____________ </SPAN><BR><SPAN CLASS=SIDEBARLINK>to the top </A></SPAN></td></tr></table></td><td align=left valign=top><SPAN CLASS=ARTICLE><p><SPAN CLASS=ARTICLESUBHEADS><a name=4>Which Is Best for You?</a><BR>
</SPAN>The most suitable type of borrowing depends on why you need to borrow and the amount. Some bank loans will offer a fixed interest rate over the term of the loan which makes repayments predictable and, therefore, easy to budget. If you feel that your need for borrowing is more than just to smooth cash flow and that it may persist for some time, then it will be worth asking about a loan. However, an overdraft is flexible and includes no early redemption penalties but interest rates are usually variable so you could find the cost rises quite suddenly.<BR>
If in doubt, discuss it with your bank branch or lending manager (and see further <SPAN CLASS=ArtikelLink><A HREF="money:navigate/guide/guide/002002.html">What Are My Options?</A></SPAN>).</P><P><SPAN CLASS=NEXTSTEPS>N E X T T O P I C</SPAN><SPAN CLASS=NEXTSTEPSLINK><BR><A HREF=money:navigate/guide/guide/002005>Home Improvement Loans</A></SPAN></p><p><SPAN CLASS=MSNtext>To access further financial articles, have a look at<br><Spann Class=MSNLink>MoneyManager on MSN!</SPAN><br><SPAN CLASS=MSNlogo><a href=http://MoneyManager.uk.msn.com><img src=msn_logo.gif border=0 align=top></a></SPAN><br> </SPAN></p><p><SPAN CLASS=CREDITS>Copyright 1997 Microsoft Corp.</SPAN></p></td>
