Bank overdraft refers to a type of credit extended to a bank’s customers.
In fact, whether you are accessing bank overdraft in Australia, India, Malaysia, the United Kingdom, or the United States, the meaning and principles are all the same.
That said, the terms of overdraft protection do vary between banks (and accounts), so it’s important to confirm the terms that apply to your overdraft before using it.
We’ll discuss all of the important considerations below and answer common questions we receive about bank overdrafts below.
This article is part of our free series on banking, including how to send money, access credit facilities, and open accounts which you can access here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Bank Overdraft
- Bank Account Types That Have Overdraft
- Frequently Asked Questions
- Ready to Explore Your Options?
Bank Overdraft
Bank overdraft refers to a form of credit that is extended to customers when a bank account is overdrawn. Overdrafts can be arranged or unarranged. The main difference between arranged and unarranged is whether the overdraft terms are agreed to before an overdraft is activated.
Bank Account Types That Have Overdraft
Most account types have overdraft that they can access, including personal and business accounts. However, overdraft protection is usually provided on transactional accounts like checking accounts, since they are more susceptible to being overdrawn. That said, certain banks will also offer overdraft protection on savings accounts as well.
In short, if having access to overdraft is important to you, you should check with your bank and discuss the available options. In addition to discussing the types of accounts that have overdraft protection, you can also confirm the terms and conditions. Doing so, you should be able to secure arranged overdraft protection, which typically has more favorable terms for the account holder.
Personal Transaction Account
Personal transaction accounts typically have overdraft protection available at most banks, depending on which country you are planning on opening in, these accounts may be referred to as checking or current accounts. Additionally, depending on the length of your relationship with the bank, you may automatically have overdraft protection extended to you.
Business Banking Accounts
Business accounts that offer overdraft protection are similar to personal accounts. In most cases, these involve transactional accounts where automatic withdrawals are arranged on behalf of the business. In doing so, businesses are able to have more confidence that their bank accounts will continue to support their business activities even in the face of a short term cash crunch.
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Frequently Asked Questions
Below are three of the most common questions that we receive from people looking into what a bank overdraft is. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Is Bank Overdraft a Type of Loan?
Yes, a bank overdraft is a type of loan offered by a bank. More specifically, it is a short-term loan facility that banks provide to customers to cover expenses that overdraw the existing balance of an account. Similar to other loans, there is a fee when the loan facility is initiated and an interest rate will apply to any balance not paid off within the allotted time frame.
Is Bank Overdraft an Asset or Liability?
Bank overdraft is a liability and not an asset when the overdraft has been activated by a customer. This is because overdraft protection is a short-term credit facility that has to be paid back by the client to the financial institution. So, the client is liable to repay the balance of the overdraft to the issuing financial institution.
How Much Do Banks Let You Overdraft?
How much a bank will let you overdraft ultimately depends on the bank, your banking relationship, and your credit history. Since overdraft is a form of credit, customers with a stronger credit history are able to access more overdraft protection. That said, activating an overdraft typically comes with both a one-time fee and ongoing interest for unpaid overdraft. So, it’s important to consider this before moving forward.
Ready to Explore Your Options?
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Of course, if you have any questions, please contact us directly.
