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Overdraft protection plans

Overdraft Protection Plans

Have you ever considered getting an overdraft protection plan? We all go through life assuming that nothing bad will ever happen to us.

Unfortunately, not everyone is that lucky. That’s why it pays to do everything we can to protect ourselves in the event that anything untoward happens, such as illness or inability to work. Different people work in different ways in this respect. Some people arrange an overdraft with their bank to give them a cushion to fall back on should they need to. But this isn’t enough by itself, and a standard overdraft has two negative aspects:

  1. You will pay interest on the amount of the overdraft.

  2. The overdraft is only good for a short term solution—no more than a month or so at most.

Seeking a solution in overdraft protection

Not everyone has heard of overdraft protection, but it’s actually a relatively cheap and easy way to give you a more secure cushion should you need some extra support.

The idea is simple. Let’s assume you have an agreed overdraft of $1000. If you go into this overdraft, you will start paying interest on the amount you are effectively borrowing from your bank.

But if you have overdraft protection, you will have access to an extra sum of money that kicks in as soon as you go overdrawn. So, instead of going into debt, the sum of money provided by the insurance you have been paying prevents that from happening—meaning that you don’t have to worry about paying large amounts of interest on what could amount to a hefty overdraft.

What are the advantages of overdraft protection?

The biggest advantage of overdraft protection is quite simple—peace of mind. The amount you will pay each month for the privilege of having an overdraft protection plan varies from bank to bank, but as a general guide you can expect to pay under a dollar for every $100 of your agreed overdraft.

This means an overdraft of $1000 would cost you less than $10 a month to protect—not a bad sum of money considering the amount of interest you would pay on that same overdraft if you used it all.

What are the disadvantages of overdraft protection?

The main disadvantage of overdraft protection is that you could be paying for the privilege of an insurance you may never use. You will need to consider what your own personal circumstances are before you decide whether or not overdraft protection is right for you.

It should also only ever be viewed as a short term solution. If you lose your job and you are out of work for a considerable length of time, the benefits offered by overdraft protection will only last for a limited amount of time.

The bottom line is that you should explore all the options available to you before deciding whether overdraft protection plans should be part of your overall insurance plan.  

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