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: The account provider and you agree in advance that you may borrow money when there is no money left in your account. The agreement determines a maximum amount that can be borrowed, and whether fees and interest will be charged to you.
- Unarranged overdraft: You borrow money when there is no money left in your
account (or when you go past your arranged overdraft limit) and this has not been agreed with the account provider in advance. 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 arranged overdraft for?
Arranged 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 arranged overdraft whenever you like, without any early repayment charges.
Some arranged 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.