The Two Sides of Overdraft Account

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Dear readers! Today I would like to talk about overdraft account which I believe a fair number of you are involved in. Currently people are incrementally opening up overdraft accounts due to merits they can withdraw money below zero balance. According to a news report, there has been a massive surge in household loan this year; loan from the overdraft account increased about 900 billion won as well. Despite various advantages of overdraft account, using of it without proper understanding could lead to disastrous results.

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Before getting right on to the main subject, I would like to make sure you get the idea what overdraft account is and who are eligible for this. Simply put, overdraft account is a loan people can apply for as long as they possess certain amount of property or collateral. There are certain standards of income, credit level, and etc that they need to meet according to different banks. Overdraft account allows people to deposit and withdraw money anytime even if their account balance is 0. People can use money regardless of the balance within their limit and make up for it later. It is mostly traded at commercial banks and is becoming more popular among people because of its benefits.

So what are the specific benefits of this system? Above all, borrowing and paying back is convenient, not to mention depositing and withdrawing money. This allows people to be able to manage their assets handily. Moreover, since the requirement conditions to open up an overdraft account is not that strict. Additionally, interest rates go down if it is an account of the applicant’s major bank or if his or her credit rating is good.

Nevertheless, there are significant shortcomings of overdraft account that people should keep in mind before using it. First and foremost, interest rate is high. Loan is computed on a compound interest basis, acting as a considerable burden to the account holders. Besides, interest imposed on arrears is excessive, being a crucial risk factor if people get to use it. Thus it is important to keep the expiration date of the account in mind to manage one’s financial soundness. Or else, if used unwisely, it may lead to a vicious cycle of an endless pit, threatening household budget and by extension, national economy on a larger scale. It should be made clear that overdraft account is still a loan. That is, it is a debt that they have to compensate for someday.

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Overdraft account is definitely one smart financial strategy people can make use of in managing their property but the existence of faults hidden under outstanding merits is a trap. People should get out of an illusion that overdraft account is an emergency fund, not a debt and be aware of its high interest compared to common loans; otherwise, they might not be able to escape from it forever. In the long run, people with overdraft account would have to unconditionally diminish minus balance by establishing realistic economic plans. For example, they can withdraw from this account only for paying redeemed principals and interest levied as a 3 or 5 year plan, while using a separate account to deposit contingency fund that will eventually replace the overdraft account. If they fail to do so, they would have to promptly prepare countermeasures with the help of a professional counselor. As in any affairs in the world, people should fully understand about something before they try their hands on it; overdraft account is obviously not an exception!

-Hoon Joon Lee (hoonjoon.j.lee@gmail.com)

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