An overdraft is a service provided by a building society or bank that allows you to make withdrawals, write cheques and make payments when you don’t have enough money in your current account to cover them in the short-term. As it's a means of borrowing money you usually have to pay fees or interest for using it.
There are two types of overdraft:
- Arranged overdraft: this is an amount agreed with your bank or building society in advance. The agreement will cover a limited amount and be reviewed on a regular basis.
- Unarranged overdraft: this is when you go overdrawn by more than your arranged overdraft limit or where you haven't agreed an overdraft limit and your balance goes below £0. Unarranged overdrafts can incur higher fees than arranged overdrafts. This can also affect your credit rating and any overdraft review your current account provider carries out.
Overdrafts are repayable on demand which makes them different to other forms of credit.
What can I use an overdraft for?
Overdrafts can be useful for short-term borrowing, for example, to tide you over until payday. Their advantage is that they’re flexible and that you can dip into them at any time while your agreement lasts. You can also repay your overdraft whenever you like, without any early repayment charges.
Some overdrafts charge interest at a variable rate. So if you want to know exactly what you’re going to pay back, you might want to look at some fixed rate options.