Banking overdrafts

Introduction

An overdraft is an additional amount of money that can be drawn from a current account when it is in debit. (In other words, an additional amount of money drawn from your account when it is below zero). Overdrafts are generally a short-term facility used to temporarily increase cashflow and allows you to spend more than you have in your current account. Although interest rates on an overdraft can be high, you only pay interest on the amount you use.

Rules

If your current account has regular incomings and outgoings, then a bank will usually grant you an overdraft. If money going into an account is withdrawn almost immediately and is not held in the account for any significant amount of time, then the bank might not grant an overdraft as it could see this as an inability to repay.

  • Overdrafts are available on current accounts only.
  • Overdraft facilities are provided at the discretion of your financial institution.
  • An overdraft and the amount that will be granted to you in the form of an overdraft, in most cases, depends on the history of transactions in the current account. If you have a bad credit history, you may find it difficult to obtain an overdraft.
  • You pay back the amount overdrawn when the funds become available in the account.
  • Overdrafts can be temporary or permanent.

If you are having difficulty paying back an overdraft

If you are having difficulty paying back an overdraft, you can ask for a time extension from the bank. This will be granted if your payment history is satisfactory.

If you continue to experience difficulty in paying pack the overdraft and are getting further and further into debt, you can contact the Money Advice and Budgeting Service (MABS). MABS will work with you to establish how much money you can afford to pay back per month. It will then contact the bank directly on your behalf. MABS will arrange with the bank for you to pay back a certain amount every month until the overdraft decreases and the debt is cleared. MABS offers this service free of charge.

Rates

Many banks charge a fee for setting up an overdraft and there is usually an annual fee (called a renewal fee) for an overdraft facility.

The amount that an account can be overdrawn (overdraft limit) is agreed in advance between the current account holder and the financial institution.

You pay interest on the amount you owe at any one time, not on the total overdraft limit available to you. The interest rate on overdrafts is usually a little higher than the rate charged on personal loans and can range from about 11% to about 15% depending on your bank.

If you go over your agreed overdraft limit surcharge interest can be charged.

How to apply

You should contact your bank or building society if you wish to find out about overdraft facilities. Applying for an overdraft includes filling out a form and can also involve meeting with the financial institution's officials. Some institutions have 24-hour help lines that take applications over the phone. Some institutions also have web sites where applications can be made online.

Page edited: 2 December 2014