Overdrafts

An overdraft is an extension of the funds available for withdrawal from an account. It is intended as a short term loan that the bank provides to the current account holder to enable payments to clear even if sufficient funds to cover the payment are not currently available. Many current account holders are able to set an agreed overdraft limit with their bank or building society if they fear that they will have low funds from time to time, perhaps due to an irregular income. An overdraft may give you extra flexibility when managing your finances.

The limit on agreed overdrafts can be extended under certain circumstances at the discretion of the banking institution. If an account holder has a poor credit history for example, a bank may refuse to extend the agreed overdraft limit beyond the current set limit (see Terms and Conditions Surrounding Current Accounts).

An unarranged overdraft may be offered on some accounts. This is an informal request for the overdraft service initiated when an account holder tries to withdraw funds exceeding the funds available, or exceeding the existing overdraft limit. If the bank, at their discretion, decides to offer the extra funding needed to cover the transaction then an unarranged overdraft is set up. This kind of overdraft is subject to large charges, and an unusually high interest rate. Interest rates on an agreed overdraft are usually far more competitively priced than those applied to unarranged overdraft credit (see Overdraft Charges).

Depending on the bank or building society, an agreed overdraft may be offered interest-free. An interest-free overdraft is a tactic to entice potential customers and it is worth researching which financial institutes offer an interest-free overdraft when choosing your current account provider, especially if you think that you may require the use of an overdraft facility in the future.