What is a disadvantage of overdraft facilities?

The disadvantage of overdraft facilities primarily revolves around the risk of high fees and charges. When a business or individual uses an overdraft, they may face significant penalty fees for going over their limit or maintaining a negative balance for too long. Unlike loans that often have fixed payment schedules and clear interest rates, overdrafts can lead to variable costs if the account holder is not careful, resulting in unpredictable amounts owed. Additionally, if the overdraft limit is exceeded, the financial institution might impose further charges, making this option potentially expensive if not managed properly.

While overdrafts provide access to immediate funds and are typically easier to obtain than more formal loans, these advantages can quickly become disadvantages if the account balance is not monitored closely. The perception of low-interest rates is often misleading, as fees associated with overdrafts can actually lead to higher overall costs. Furthermore, unlike a loan application process that can indeed be lengthy, obtaining an overdraft is usually straightforward, which makes the immediate risks associated with it even more critical to consider. Thus, the high fees and potential for escalating costs are key reasons why one should approach overdraft facilities with caution.