Bank Overdraft Meaning

Bank Overdraft Meaning

A bank account overdraft is a financial instrument which can be used by an individual when his balance is zero. Bank overdraft meaning occurs when there is not enough money in an account to cover a transaction or withdrawal still the bank allows you to complete the transaction. Basically, it is an extension of your balance in the form of credit from the financial institution.  

The bank overdraft is a facility to the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

There are two types of bank overdraft which can be used by the customers of banks.  

1. Authorized bank overdraft

An authorized overdraft is the arrangement that is made balance between the account holder and their bank in advance. The borrowing limit can be used on all normal payment methods on that both the parties agree through an agreement. This arrangement comes with a service fee that varies from bank to bank.

The fee is generally charged on a daily, weekly, or monthly basis, along with interest, which can be as high as a 15% to 20% annual percentage rate.  

2. Unauthorized bank overdraft

An unauthorized overdraft means that the overdraft has not been agreed upon in advance and the account holder has spent more than his account’s remaining balance. It can also happen even if there has been a prior agreement if the account holder has gone beyond the agreed bank overdraft amount.

Remember  

Bank overdrafts do not have a set repayment schedule, allowing you to decide when you want to make a repayment. You should also carefully consider the overdraft limit you apply for just to avoid overspending.