If you’re planning on opening an account in a developed financial market, you might be wondering if there are any disadvantages of bank overdraft being available on your account.
In this article, we’re going to take a look at this question and discuss whether you can even apply for banking services and open a foreign bank account online with overdraft protection as a non-resident.
We’ll also reflect on which accounts you might want to consider, including traditional banking or opening an instant bank account with a virtual debit card.
Feel free to jump ahead to the areas most relevant to you by using the table of contents below.
Table of Contents
- Bank Overdraft 101
- Disadvantages of Bank Overdrafts
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
Bank Overdraft 101
Generally speaking, overdraft simply refers to spending more money than you have in your account. In most cases, an overdraft is available via a checking or current account.
Individuals who are looking to save money instead of spend might consider opening a limited-access savings account.
There are two types of overdraft that account holders should be aware of, arranged and unarranged.
Not surprisingly, arranged means the terms of the overdraft have been agreed to with the bank before an overdraft occurs. On the other hand, unarranged means that an account holder has overdrafted their account without prior approval or has exceeded the amount of an arranged overdraft.
In short, an overdraft is a debt. And, your bank is well within its rights to demand repayment at any time. However, in most cases, overdraft limits are agreed to in advance.
Of course, by having an arranged overdraft ahead of time (and staying within those limits), it’s unlikely that a bank will request repayment ahead of any agreed-upon schedules.
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Disadvantages of Bank Overdrafts
If you are in a position where a bank overdraft is necessary, you may want to consider opening an account with a domestic bank in your country of residence. The reason for this is that bank overdraft is typically reserved for retail accounts, and as it is a debt product it often requires a local tax identification number.
Alternatively, if you’re looking to open accounts with digital banks, such as an instant bank account with a virtual debit card, you can access our free guide linked here to get started.
Of course, if you have a tax identification number in a foreign country, you may be eligible to open an account with an international bank that offers overdraft protection as well.
However, most international banks cater to individuals and businesses that do not require overdraft protection. Instead, they offer alternative debt products such as Lombard loans, non-resident mortgages, alternative asset-backed financing, and more.
Higher Interest Rates
Bank overdraft often has a significantly higher interest rate than other credit products offered by banks. Overdraft interest rates are often significantly higher than credit cards and other short-term financing solutions. For example, a popular international bank headquartered in the United Kingdom charges almost 40% (annually) on overdraft balances.
Banks Can Cancel Your Overdraft At Any Time
Overdraft is like any other credit product issued by a bank, it can be canceled at any time. With this in mind, you mustn’t rely on overdraft protection as a substitute for an account balance as banks can request payment (or take payment from other accounts) whenever they feel it is necessary.
Frequently Asked Questions
Below are two of the most common questions that we receive from people looking to open non-resident bank accounts. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Is It Good to Have Bank Overdraft?
Having a bank overdraft can be helpful if you are maintaining a low balance in an account. However, overdraft is debt and should not be relied on as a substitute for sufficient cash balance in an account.
How Can I Avoid Overdraft Fees?
To avoid overdraft fees, you should maintain a sufficient balance in your account to cover any automated payments and upcoming expenses.
Do You Want Help Opening Bank Accounts?
If so, you can access GlobalBanks Insider and start the process of applying for an offshore account in a few clicks.
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And “yes!” GlobalBanks Insider is designed to help foreign and non-resident individuals and companies open bank accounts.
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