Overdrafts

An overdraft is a loan you arrange through your bank 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'. Unlike other loans, you do not have to pay back a specific amount every week or month. The amount you owe on your overdraft goes up on down depending on how much you spend and put into your current account.

Your bank usually sets an agreed time limit, so that you have to pay your overdraft back by a set date. However, your bank may renew your overdraft on that date if you request it to be extended.

Why use an overdraft?
How overdrafts work
Interest and how it is charged
Fees and charges

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.

You can spend your full overdraft limit all at once, or spend only what you need bit-by-bit using cheques, your debit card or withdrawing cash at ATMs.

How overdrafts work

You repay your overdraft over short terms of between six and 18 months and your bank sets the deadline date for repayment. You can clear your overdraft more quickly if you want to, and that will save you interest. Usually, the only way to repay an overdraft is to regularly put more money into your account than you spend.

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.

Don't regard your overdraft limit as a ‘target for spending' as you may find it difficult to pay off in the agreed time.

Interest and how it is charged

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% 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

Fee	Reason for charge
Facility fee	This is a one-off fee for setting up your overdraft.
Renewal fee	This is only charged if you renew your overdraft at the end of the agreed term.
Interest surcharge	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 overtime limit. Surcharges range from about 6% to about 12%.
Over-limit referral fee	This is a fee your bank charges for each transaction you make over your overdraft limit.

There may be other indirect costs attached to an overdraft as well. For instance, discounts on bank charges may not be available if your account is overdrawn.