How do overdrafts work?

What is an overdraft?

An overdraft facility is available with most bank accounts and lets you borrow money to keep spending after your balance reaches zero. For example, if you spend £50 when there’s no money in your account, you end up with a negative balance of -£50. This is known as being overdrawn.

Some accounts offer free overdraft facilities up to a set amount, meaning that you can borrow money without paying any interest or fees.

These can be the cheapest way to borrow a small amount of money for a short period and are useful if you need to cover a bill in an emergency or run out of money before payday.

However, overdrafts can be very expensive if:

• It is not free

• You want to borrow a large amount of money

• You want to borrow  money over a long term

What overdraft limit can you get?

Overdrafts can run to many thousands of pounds depending on the bank. The maximum limit on your authorised overdraft depends on two things:

• How much the bank is willing to offer you. Some provide a set amount like £500 as standard.

• Your financial circumstances. Sometimes your overdraft limit by checking is calculated based on your income and credit record.

If you go beyond your overdraft limit, some banks will let you continue to spend money. However, there may come a point when they stop you from making cash withdrawals, spending on your card, or paying bills. You should be told about any limits when you sign up for a new current account. 

Can you withdraw overdraft money?

Yes, you can withdraw cash from your overdraft facility by using a cash machine. How much you can take out depends on what your daily limit is.

How long do overdrafts last?

You sometimes have to pay back an unauthorised overdraft before a deadline set by your bank.

Your bank can also withdraw a free overdraft, which means you would have to pay it back before the date they set; otherwise, you have to pay fees.

How to get an overdraft

You can get an approved overdraft by applying for a bank account that offers this facility. Most banks have them, but not on all of their accounts. For example, basic and prepaid current accounts do not include overdrafts.

Our comparison can help you locate one.

It includes details of the fees and interest rate that comes with each overdraft so you can choose the cheapest option.

Who can get an overdraft?

Banks have their own eligibility rules on who they offer their accounts to, but you usually need to be at least 18 and live in the UK.

What types of overdrafts are there?

Authorised or agreed overdrafts give you a limit that your bank decides on when you open an account. For example, if you had an overdraft limit of £500, you would have that amount to spend even if there was no money left in your current account. Unauthorised or unplanned overdrafts are when you have a negative balance on a bank account that does not have an agreed overdraft facility or if you spend beyond an approved overdraft’s limit. 

How much do overdrafts cost?

Banks used to charge several fees and interest charges for overdrafts making it confusing and hard to compare costs.

There were different fees for authorised and unauthorised overdrafts and daily and monthly fees charged by some providers.

This is to make overdrafts fairer for customers. So users of unarranged overdrafts will be better off or see no change. It also makes it a lot easier to see how much an overdraft will cost, which will help you when comparing different bank accounts. 

Free overdrafts

Some bank accounts allow you to go overdrawn up to a set amount without charging any interest or fees.

Some offer a small buffer amount that allows you to go a few pounds overdrawn by mistake without any charges, but others provide several hundred pounds for free.

How to check your overdraft

You can check your overdraft limit by asking your bank, signing in to its internet or mobile banking platform, or checking the paperwork you received when you opened your account.

You can also set up text messages or email alerts that let you know when your balance falls below a certain amount. This can help you track when you are near your overdraft limit.

How to extend your overdraft

You could avoid fees by increasing your overdraft limit. The only way to do this is to ask your bank by:

• Phoning them

• Visiting a branch

• Writing to them

• Requesting internet banking

What if they refuse?

You could move to a new bank account with a larger overdraft facility or borrow money in a different way, such as with a loan or credit card if that works out cheaper than using your overdraft. However, it’s also worth looking at why you have been refused by checking your credit history. 

If the refusal is because your credit score is less than perfect, another provider may not accept you. Plus, making lots of applications in a short space of time can harm your credit score. It could be a good idea to improve your credit record before making another credit application.

How to pay off your overdraft

Paying off your overdraft could save you money if you have to pay any fees or charges for it. Here are some suggestions about how to pay it off.

Alternatively, you could switch to a new bank account with a cheaper or free overdraft. Some banks let you move the amount you owe over to your new account. Here is how to switch to a new bank account.

How overdrafts affect your credit record

Using any financial product that lets you borrow money shows up on your credit record, and this includes a bank account with an overdraft.

If you apply for a loan, mortgage, credit card or any other form of borrowing, the company will check your credit record. If you owe too much on your overdraft or frequently go over its limit, this could make lenders less likely to accept you.