In recent times, the concept of "going into the sea" or "buying a house" among those in their 2030s has been circulating. This actually refers to the use of overdraft accounts or taking out loans. In the first half of 2020, the number of newly opened overdraft accounts and their limits for individuals in their 20s increased significantly.
Understanding Overdraft Accounts:
Commonly referred to as "Ma-Tong" in South Korea, overdraft accounts allow individuals to borrow money within a predetermined limit set by financial institutions. Even if the account balance is zero, if the overdraft limit exists, money can be borrowed and used. However, it's important to note that an overdraft account is essentially a type of loan, formally known as a "limit loan." So, why do people opt for overdraft accounts instead of traditional loans, and what differentiates the two?
Benefits of Using Overdraft Accounts:
1. No Need for Separate Application:
Unlike loans that require a formal application process and bank approval, overdraft accounts allow users to borrow and repay money within the predetermined limit without needing additional assessments. As long as the borrowing stays within the limit, there's no need for further approvals, even if more funds are required later. Additionally, there are no fees for early repayments.
2. Interest is Charged Only on the Used Amount:
For an overdraft account with a limit of 100 million won, if only 2 million won is used, interest is charged only on the 2 million won, not the entire 100 million won. Moreover, since interest starts accruing from the date of borrowing, it can be a cost-effective option for short-term borrowing compared to conventional loans.
Things to Be Cautious About:
1. Higher Interest Rates:
Overdraft accounts typically have interest rates around 2-4% (as of 2020). Although lower than cash advance services, they are higher than standard personal loans. Additionally, the application of compound interest means that if borrowed funds are not repaid promptly, interest can accumulate rapidly.
2. Total Limit is Considered a Debt:
Having a 50 million won overdraft limit, even if only 2 million won is used, the entire 50 million won is treated as a debt. This can affect the eligibility for additional loans, as the total debt is taken into account.
Eligibility and Process of Obtaining an Overdraft Account:
To acquire an overdraft account, individuals need to provide their identification, employment certificate, salary bank account information, and tax withholding receipt. This means that those without an employment certificate, such as job seekers or those who are unemployed, might not be eligible for overdraft accounts. Additionally, the approval and limit of an overdraft account can vary based on the individual's credit score and income level.
In conclusion, while overdraft accounts provide a convenient way to borrow money within a predetermined limit, individuals need to be aware of the interest rates, potential long-term costs, and the impact on their overall debt situation.