Overdraft

What is an overdraft?

An overdraft is an extension of your current account that allows you to borrow money to an agreed limit. Depending on the type of current account you have, there are fees and/or interest for when you use the overdraft.

Some current accounts automatically offer an overdraft, you will need to check your agreement, otherwise you can request one from your bank.

Types of overdrafts

Authorised/Arranged overdraft

This is when an agreed limit has been set by your bank. Typically fees apply for going into an overdraft, the fee will depend on a number of factors such as how much you borrow or how regularly you do, these fees vary depending on the bank you use.

An overdraft charge can be made up of:

  • Interest, which can be up to 15-20% equivalent annual rate (EAR)
  • A daily (50p-£3 a day), weekly or monthly fee

It’s important to be aware of your terms and conditions so you know the charges. There are some accounts that offer ‘interest-free overdrafts’ either up to a certain limit or dependent on the account type i.e. student accounts typically offer interest-free overdrafts.

Unauthorised/Unarranged/unplanned overdraft

This is when you spend more than you have in your current account and you don’t have an agreed overdraft limit, or you go over your agreed limit.

Charges typically apply, you will need to check with your bank as to how much but the cost usually increase regularly.

  • Monthly fee can be anything from £5 to £35 or more.
  • Daily fee can be £1 to £6 a day or more (usually up to a set limit per month).
  • Transaction fees can be £10 to £25 for every cash withdrawal, direct debit or standing order, cheque or card payment you make – whether or not your bank allows the payment.

Why would I need one?

For emergencies or short-term borrowing. It is easy to treat the overdraft limit as your spending limit but this can be costly and a slippery slope. Make sure you read all terms and conditions when you opt for an overdraft as it’s essential that you’re aware of any hidden costs, and know exactly how much the charge is for exceeding the set limit.

Information sourced from the Money Advice Service, for more info head to their website

Post Tags: