The Real Cost of Overdraft Loans

At the beginning of the year, Equity Bank launched its overdraft facility, Boostika. Boostika is similar to Fuliza, an M-Pesa overdraft facility that, in August last year, reported that Kenyans were borrowing Ksh2 billion daily. 

Although these two are the most popular overdraft facilities in the market for the masses, most banks offer overdraft services to both individuals and businesses. However, these overdraft loans come at a cost. This article will explore what overdraft loans are, what their examples are, what their real cost is, their advantages and disadvantages, and their ideal use case.

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What Are Overdraft Loans?

Overdraft loans are a credit facility extended to an account holder by a bank or financing institution that allows an account holder to withdraw from their current account even when their account is zero. 

Essentially, this is a loan linked to a current account. When the current account has no balance, the bank allows the customer to overdraw and the amount withdrawn is considered a loan.

This overdraft loan attracts interest and fees. Depending on the lending institution, the terms of the loan vary, such as repayment periods, fines, and the amount of interest and fees.

Overdraft loans can be offered to an individual's current account or a business's current account. Business overdraft facilities are designed to provide steady access to financing needed to maintain a stable cash flow in a business.

Examples of Overdraft Loans

Most banks in Kenya offer overdraft loans to both individuals and businesses. To access an overdraft loan, you need to speak to your bank for more information.

Nevertheless, two popular overdraft loan facilities on the market are accessible to the masses. Fuliza is an overdraft service accessible to M-Pesa registered users, while Boostika is an overdraft facility accessible to Equity Bank customers.

Fuliza

Fuliza is accessible when you are paying using M-Pesa. However, before using it, you have to opt in. Once you opt-in, you are given a limit on the funds you can access. The amount depends on your M-Pesa transactions. Once you are making a payment and you run out of money in your account, you will be prompted to continue the transaction and draw the balance from Fuliza. Fuliza charges a 1% access fee, a daily maintenance fee, and a 20% excise duty on the fee.

Read Also: How to Withdraw From Fuliza Directly at an M-pesa Agent

Boostika

Bosstika is a similar product to Fuliza, offered by Equity Bank. To access Boostika, you also have to opt in. Boostika, however, is available to customers through three access points: the USSD code, the Equity mobile app, and the Equitel line. The overdraft facility is embedded in the payment journey. When you make a payment and your account runs out of money, you will receive a prompt to use Boostika. Fees related to Boostika include a processing fee, excise duty on fees, insurance, and an interest rate of 18% pa. Additionally, Boostika is payable within 30 days of accessing the facility.

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Cost of Overdraft Loans

The cost of overdraft loans varies from institution to institution. It can also vary depending on whether the account is a personal or business account. The following are costs that can be associated with overdraft loans:

• Interest Rates: These are charges incurred when you access an overdraft facility. These interest rates are charged on the amount accessed on overdraft. For instance, the Boostika 18% pa interest rate is charged only on the amount accessed.
• Fees: There can also be fees associated with an overdraft loan. An example of these fees is the processing fee. Typically, these fees are fixed and are only charged when you access the facility, however, some overdraft facilities, such as Fuliza, charge the access fee as a percentage of the amount accessed.
• Account Terms: Depending on account terms, the facility can have additional charges or have some other charges waived. For instance, in some accounts, overdraft charges are not inclusive of tax.

Advantages and Disadvantages of Overdraft Loans

Overdraft loans have their utility, however, as much as they are useful, they also have disadvantages. 

Advantages

• Convenience: Overdraft loans provide convenience as they are easily accessible. With products such as Fuliza and Boostika, you can access them immediately and complete transactions seamlessly.
• Flexible Repayment: Overdraft loans have flexible repayments. There are no monthly installments, you pay back when you can. However, some have a repayment period in which you have to repay the loan.
• Less Paperwork: Overdraft loans, compared to other loans, have less paperwork. You do not need to apply for the loan; you just overdraw from your account.
• Provide cash flow: Overdraft loans are fantastic since they are easily accessible and can provide needed cash flow in a business to maintain smooth operation.

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Disadvantages

• Higher Interest Rates: Overdraft loans can attract higher interest rates compared to traditional loans. Some overdraft loans are secured and others are unsecured. The unsecured overdrafts tend to attract even more interest.
• Additional fees in case of default: For overdraft loans whose repayment period is specified, failure to clear the balance before the lapse of the period can attract additional charges on the overdraft loan.
• Lower borrowing limits: Compared to other loan facilities, overdraft loans provide lower borrowing limits. This facility is meant to be more of a convenience facility that helps one address emergencies and short-term financial needs.

When to Use Overdraft Loans

Overdraft loans are not ideal for every situation. These are three situations where overdraft loans can be ideal.

• Fix Short-Term Cash Flow Issues: Overdraft loans can help you cover short-term cash flow needs, such as when you encounter delayed payments or unexpected expenses.
• Emergency Expenses: Overdraft loans help you address emergencies when they arise. If for instance, your vehicle breaks down, or there is a sudden illness, or any other emergency, having access to an overdraft facility can be very helpful.
• Bridge to Other Financing: Overdraft facilities can also be very handy as they provide a bridge to other financing. For instance, when waiting for a loan to be processed or an investment to mature.

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Wrapping Up

’Overdraft loans can be helpful when you need short-term, convenient, fast access to a loan. However, they can also cost more than traditional loans, and overreliance on these loans can destabilise you financially. Nonetheless, when in need, these facilities come in handy and save the day.