An overdraft is an extra amount of money that your bank or building society allows you to use even when you have nothing left in your current account. The bank agrees to loan you a certain amount for a short time, and you can go on spending up to that limit. You will have to pay back what you spend from your overdraft, plus interest. Interest rates on an overdraft can be high, but you only pay interest on the amount you use.
If money goes regularly in and out of your current account, then your bank will probably let you have an overdraft. However, if you usually take your money out of your account almost as soon as it goes in, then the bank may not be willing to allow you an overdraft in case you cannot pay it back.
- Overdrafts are available on current accounts only.
- Your bank has the right to decide whether to allow you an overdraft.
- You agree your overdraft limit in advance with the bank.
- How much overdraft you get, if any, usually depends on how well you have managed your account in the past. For example, the bank will check whether you pay your bills regularly or pay off your credit card debt every month. If you have a bad credit history, you may find it difficult to obtain an overdraft.
- You pay back the amount you have overdrawn when you have enough money in your account to do so.
- Overdrafts can be temporary or permanent.
What if I can’t pay back an overdraft?
- Ask the bank for more time to pay back what you owe. The bank is likely to agree to a time extension if you have paid off your debts in the past.
- If you still cannot pay back the overdraft and are getting further into debt, contact MABS (the Money Advice and Budgeting Service). MABS will help you work out how much money you can afford to pay back per month. It will then contact the bank for you. MABS will arrange with the bank that you will pay back a certain amount every month until the debt is cleared. MABS offers this service free of charge.
What are the fees and charges?
- Many banks charge a fee for setting up an overdraft and an annual fee (called a renewal fee) for keeping it.
- 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%.
- If you go over your agreed overdraft limit, you may have to pay surcharge interest.
How to apply
First contact your bank or building society. You may be able to apply online via the bank’s website, or by phone on its helpline, or by filling in a form on paper. You may also have to talk to bank staff in person about your application.