What is an overdraft?

It comes with most bank accounts to let you borrow money and keep spending if your balance reaches zero.

For example, if you had no money left in your account and then spent 50, you would have a negative balance of -50. This is called being overdrawn.

Some overdrafts charge no interest or fees, meaning you can use them to borrow money for free.

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

However, they can be very expensive if:

  • Your overdraft is not free

  • You want to borrow a large amount of money

  • You want to borrow for a long term

What overdraft limit can you get?

They can be between 10 and thousands of pounds. The maximum limit on your authorised overdraft depends on two things:

  1. 1.

    How much the bank is willing to offer on their accounts. Some offer an overdraft for a set amount like 500 as standard.

  2. 2.

    Your financial circumstances. Some banks decide if they can offer you an overdraft and its maximum limit by checking your income and credit record.

If you go beyond your overdraft limit, some banks let you continue to spend money. There may be a limit before they stop you making cash withdrawals, spending on your card or paying bills. Ask your bank if they have a limit.

How to get an overdraft

You can get one by applying for a bank account that offers an overdraft. Most banks offer accounts with overdrafts, but not all of their accounts have them. For example, basic and prepaid current accounts do not come with overdrafts.

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

What types 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 could still spend 500 after you spent all the money in your account.

  • Unauthorised or unplanned overdrafts are when you have a negative balance on a bank account that does not have an overdraft, or if you spend beyond the limit on an account with an agreed overdraft. They are usually much more expensive.

How much do they cost?

There are several fees and interest charges that can come with overdrafts. Check your terms and conditions or ask your bank to find out how much it charges.

They are taken from your account, so if you were overdrawn by 1,000 and were charged 20, your new balance would be -1,020.

Authorised overdrafts

Banks may charge some of the following fees if you use an overdraft:

  • Interest, usually charged at a rate of 15-20% for as long as you are overdrawn

  • A daily fee charged until you pay back what you owe

  • A weekly fee

  • A set monthly fee

  • An arrangement fee when you first set up or use your overdraft

Interest on overdrafts is only charged on the amount you are withdrawn by, not your total limit. If you have an agreed overdraft of 500 and you go overdrawn by 20, you will be charged interest on the 20, not your full limit.

Unauthorised overdrafts

Unauthorised overdrafts usually cost much more than agreed overdrafts.

You may have to pay:

  • A higher monthly fee

  • A much higher interest rate than on an authorised overdraft (up to 30%)

  • A daily fee charged until you pay back what you owe

  • A fee for every transaction you make while overdrawn

Free overdrafts

Some authorised overdrafts come without interest charges and fees up to a certain limit.

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

How to check your overdraft

You can check your overdraft limit by asking your bank, signing into internet banking or checking the paperwork that came when you opened your account.

You can find out how much you owe on your overdraft by checking your balance online, through your bank's app, at an ATM or by asking in a branch or by phone.

You can also set up text message or email alerts that let you know when your balance falls below a certain amount. This can help you keep track of 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

  • Making the request through internet banking

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 is how to pay it off bit by bit or by using another financial product.

Alternatively, you could switch to a new bank account with a cheaper or even 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.