An overdraft is a loan you arrange through your current account. It allows you to spend more money than you have in your current account up to an agreed limit, known as the ‘overdraft limit’.
Why use an overdraft?
Overdrafts may not be the cheapest way to borrow money, but they are flexible and useful for short-term credit and for relatively small amounts. For example, a short-term overdraft can help you meet extra expenses such as back-to-school costs, Christmas or holiday expenses. Or if your income is not regular, an overdraft can help you manage your money.
How overdrafts work
The amount you owe on your overdraft goes up and down depending on how much you spend and put into your current account. You repay your overdraft over short terms of between six and 18 months and your bank sets the date for full repayment. You can clear your overdraft before the expiry date if you want to, and that will save you paying more interest.
If you don’t clear your overdraft within the agreed time limit, you can damage your credit rating and make it difficult to get another loan or overdraft later on. Try not to use an overdraft too often as the more often you use it, the more interest you will pay. Some overdrafts also have a condition that your account must be in credit for a certain number of days in a year, for example, 30 days.
Don’t go over your overdraft limit – as this will be recorded on your credit history and you will be charged additional interest and fees.
Interest on overdrafts
You pay interest on the amount you owe at any one time. 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.
Overdraft interest rates are variable, meaning they can go up or down. If your bank decides to change the overdraft interest rate they must tell you in writing or publish a notice in a national newspaper. You will see any change on your bank statement too.
Other fees and charges
|This is a one-off fee for setting up your overdraft.
|This is only charged if you renew your overdraft at the end of the agreed term.
|This is extra interest that your bank charges if you spend more than your agreed limit. It is charged on top of your standard rate of APR for the agreed overdraft limit. Surcharges range from about 6% to about 12%.
|This is a fee your bank charges for each transaction you make over your overdraft limit.
Last updated on 27 September 2022