So what does it mean when you use an overdraft?

An overdraft is the amount you get to use as a form of credit when there is no balance in your account. You can withdraw this money or pay with your debit card. Even though you don’t have enough money for the transaction, the bank may still pay for the transaction.

Are there any benefits for an overdraft?

No one wants to have an overdraft on their account. But, in some situations, having an overdraft offers flexibility when you might need it most. One of the biggest benefits of an overdraft is that you can get money instantly, and not have to wait to apply for a loan or line of credit.

You can think of an overdraft as similar to taking out a small loan, but only when you absolutely need it. So, if you’re making a purchase but don’t have the money, you can use your bank’s overdraft feature to pay for it, and pay back the money later.

In many instances, the amount you have to pay back to your bank will be less than if you had taken out a loan. Some banks may not even charge you for an overdraft, as long as you pay back the owed amount quickly.

Are there drawbacks?

While it’s nice to have the security of an overdraft, there are costs. Banks and financial institutions charge fees for an overdraft on your account. This is on top of the interest you’ll pay on the amount borrowed from your bank. Sometimes these fees can be low, but some banks charge very high overdraft fees which make it very expensive to use an overdraft.

Also, you may overdraft an account without even realizing it! Usually, you won’t get a notification before you use an overdraft. So, even if you didn’t want to overdraft your account, you may do so anyway and not know until later when you check your bank statement.

Understand what an overdraft is before you use it

You never know when you might need to avail an overdraft. So, before that time comes, make sure you fully understand your bank’s overdraft policy. This can include:

• If your bank allows for an overdraft
• How much time you have to pay it back plus interest and fees, if any
• The interest rate to be paid on an overdraft
• Any fees associated with an overdraft
• Please check for any other terms and conditions that may apply

Once you know the answers to these questions, you’ll be better prepared if the time comes. Make sure you speak to your banker to get all details first.