What Is An Overdraft

By : Admin
Guide 10/03/2018 04:48pm
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Overdraft is when a bank allows you to borrow money and keep spending when the balance of your bank account with them reaches zero. For instance, if there is no money left in your account and you spent $100. You will have a negative balance of -$100, which is called being overdrawn. There are banks who do not charge interest or fee on overdrafts. You can use the overdrawn amount for free, which makes it the cheapest way to borrow a small amount of fund for a short term. This can be a useful solution if you need to cover an emergency bill or if you have run out of money and your payday is far away.

A good overdraft will allow you to borrow money for free. However, overspending on the wrong account can get you into financial trouble. They can be very expensive if the overdraft is not free, you need to borrow a large amount of money and for a long term. 

Overdraft Limit

The limit can be anywhere between $10 and thousands of pounds. The maximum limit will depend on two things-

  • It will depend on the bank how much they are willing to offer on their accounts. Most of the banks offer an overdraft for a set amount of $500 as standard.
     
  • Next, it will depend on your financial circumstances. There are many banks that will decide if they can offer you overdrafts as well as the maximum limit depending upon your income and credit record.

Even if you go beyond your overdraft limit, banks may allow you to continue to spend money. Though there will be a limit before they stop you from making cash withdrawals or spending on your card. Thus, it is recommended that you ask your bank if they have a limit.

Get An Overdraft

You can get an overdraft by applying for a bank account with a bank that offers an overdraft. Most of the banks in the UK offer accounts with overdrafts. But they may not offer overdraft on all the accounts they have. For example, prepaid and basic current accounts do not offer overdrafts. You can easily draw online comparison of every bank accounts offered with an overdraft in the UK. Do not forget to check other details such as fees and interest rate that comes with such overdraft so that you can find a cheapest option.

Types Of Overdraft

Authorised Or Agreed Overdrafts- This type of overdraft gives you a limit that the bank decides on when you open your bank account. For example, if you had an overdraft limit of $1000, you can spend $1000 after you have spent all the money in your account. Bank may also charge you a daily fee until you pay back what you owe, a weekly fee, a set monthly fee and an arrangement fee when you first used the overdraft. Interest is generally charged only on the amount that you have withdrawn and not on the total limit.

Unauthorised Or Unplanned Overdrafts- Such overdrafts are when you have a negative balance on your bank account that does not offer overdraft, or when you have spend beyond the limit on an account with an agreed overdraft. Such overdrafts are much more expensive. For unauthorised overdrafts you will have to pay a higher monthly fee, a much higher interest rate compared to an authorised overdraft, a daily fee until you pay what you owe and a fee for every transaction that you make while overdrawn.

Cost

There are several charges and interest associated with overdrafts. Make sure you go through the terms and conditions or ask your bank beforehand to find out how much they will charge. The charges will be collect from your account. Suppose you were overdrawn by $500 for which you were charged $20, your new balance would be -$520.

Paying Off Your Overdraft

Pay off your overdraft and save money on fees and other charges. You could also use another financial product to pay it off. Alternatively, you could consider switching to a new bank account offering free or cheaper overdraft. Some banks may allow you to move the amount you owe over to a new account.

When you owe too much on your overdraft or go over the limit frequently, it will appear on your credit record. This could make lenders less likely to accept your loan, mortgage or credit card request.

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