Overdraft

Err...

I'm no expert in this OD thingy but I was ask by a friend on how to calculate its interest. I'll try to answer as much as I can and forgive me if said anything wrong ya. Don't sue me!! Please....

Ok here goes....

First of all, let's get the correct understanding of an overdraft.

As stated in wisegeek.com:

''An overdraft facility is a formal arrangement with a bank which allows an account holder to draw on funds in excess of the amount on deposit. Overdraft facility financing is most commonly used by businesses as a way of making their working capital more flexible, although it can also be available to individuals. Banks which offer this service typically have a number of expectations from customers who use it, and it is important to be aware of these expectations before entering an overdraft facility agreement.

The idea behind overdraft facility agreements is that sometimes one needs a bit more money than is available on deposit to deal with various expenses. For example, a business which is always slow in March and April might like to use its overdraft facility to make payroll and keep current with all accounts and creditors. Or, a business might need to make a big one-time expense which exceeds the funds on deposit.

With an overdraft facility, people can repay the funds at their convenience. The bank may charge an overdraft fee for accessing the overdraft facility, and the interest rate can be higher than that for other types of loans. The bank also has the right to demand repayment in full. Balancing an overdraft facility wisely can free up capital and make people more stable financially, but unwise use can lead people into a spiral of debt which may be difficult to escape.

The amount of an overdraft facility is also curbed; people are not allowed to continually take money out and not repay it. The amount of the overdraft is usually pegged to account history and financial information, with the goal of ensuring that people do not end up borrowing more than they can realistically repay through an overdraft facility. The agreed limit can be negotiated with the bank, and some banks are willing to reevaluate if customers feel that their circumstances have changed.

Overdraft facilities provide flexibility and a bit of a buffer which can be used to ride through a period of hard times. However, other lending instruments may be more practical, and it is a good idea to talk about options for accessing lines of credit and loans with a bank staffer or financial advisor before making any firm choices. It is important to avoid making a financial choice which would be problematic later in the hurry to access funds to deal with a current problem''

Faham ka? Tak faham kalu, cuba baca balik........:p


Still, how do you calculate the interest charged dear master? (I'm no master you egget!!!) Ok here comes the million dollar answer..

I have to admit that I'm very bad in answering questions just by writing. Hence, I'm gonna give an example.

Here goes:

Mr Ariff has got about RM50000 of OD facilites from Abe Power bank. All this while he has not got the courage to use the OD facilities for some strange reason or another (strange kan?). So he was wondering what would be his total interest(at the end of the month) if he is to take out RM10k from his OD account. Let's assumed that he will pay the total money used (RM10k) at the end of the 30th day.

The answer is pretty straight forward. Let's do the math.

rm10000 x 5.55%/365 x 30 = RM42.21

In short, Ariff has got to pay RM42.21 at the end of the month for the usage of RM10,000. This Rm42.21 will keep on increasing if Ariff does not do any lodgements for the following days, weeks and months.

faham tak?...

For the second example, please have a look on the table below. A pretty basic calcuation on how the interest is being calculated.



Ok now, from the example above, you can see that Mr A has taken Rm5000 from his OD account on the very first day of the month. On the 3rd day, he took out another RM10,000 from his OD account. Hence, in the end of the 3rd day, his total interest would be about Rm3.80. As you can see from the table, Mr A has also made some lodgements into his account which helped him in lowering his interest charged. The trick here is, always, always put your money in your OD account to help you reduce your interest charged. The earlier the better. (that is if you ever use your OD facilities-having said that, why bother having an OD facilities if you don't use it...dennnggg!!!)

In fact, I have to admit, I managed to settle all my credit cards bills using this method and now I don't have any more headache as to how to settle my credit card bills. Instead of seeing the wording INTEREST CHARGED on the bills, I now see Outstanding Balance: Nil. Hehehe. very nice eh? In fact, I save loads of money using this method rather then paying 5% every month for the CC bills. Anyhoos, that is history and now that I learnt my lesson, I hope that all of you out there won't be in the situation that I was previously. Credit Card is a killer!!! Damn you!!!

Hope I have answer as to how the interest is being calculated. If ada salah dan silap adalah kerna kurangnya ilmu pengetahuan saya dalam bidang nih. This is what I understand for the time being...

By the way, just a point to note, having an od facility helps me a lot especially in terms of expanding my investments. ANd of course, having ready cash with you all the time can always be dangerous unless you're very, very dicipline.

Another subject that I wanna touch is, ways to reduce your OD interest.

Let's take the table calculation example again. We know that Mr A has taken a total of RM15k of his OD facilities. If Mr A doesn't put any lodgements until the end of the month, the total interest charged will be about RM68(+/-).

However, based on the table, you can see that he has made several lodgments during the course of 30 days. Now, instead of paying about RM70 for the interest charged, Mr A now only has to pay about RM44. That's a saving of rm26. Perhaps, RM26 will give you 2 days of good meals....hehehehe

So the trick is, lodge in what ever money that you receive to help lower your montly interest charged.

Masuk Cepat Keluar Lambat. Hehehe. Remember that key word!!


Have a good week ahead...