Overdraft

When the amount of money withdrawn from a bank account is greater than the amount actually available in the account the excess is known as an 'overdraft' and the account is said to be 'overdrawn'. This is a form of short-term borrowing that all of us are likely to be familiar with - in short it is the act of overdrawing from a bank account. In other words, the account holder withdraws more money than has been deposited in the bank account.

If agreed in advance by the bank, this is essentially a form of loan facility. If not agreed in advance, penal charges may be incurred. In addition to any penalty fees, the rate of interest that is charged for an “unauthorised” overdraft (where you have gone over an agreed credit limit or have overdrawn without prior arrangement) is substantially higher than on agreed overdrafts. The differential between the rates charged for authorised and unauthorised overdrafts can be as much as 20%.

See also: Financial Services