How do overdrafts work?

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

Find an interest free overdraft here

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

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 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 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.

Find one using our comparison of every bank account with an overdraft in the UK.

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 to get an overdraft.

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?

Banks used to charge several fees and interest charges for overdrafts for authorised overdrafts. These same fees and charges used to be even higher for unauthorised overdrafts.

Since April 2020, however, providers can no longer charge higher rates of interest for unarranged overdrafts than they do for arranged overdrafts. Banks can also no longer change flat fees for overdrafts, but only a single annual interest rate.

This is to make overdrafts fairer for customers. So users of unarranged overdrafts will be better off or see no change. A majority of consumers using an arranged overdraft will also see an improved outcome or no difference.

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

What if they refuse?

You could move to a new bank account with a larger overdraft or borrow money a different way, such as with a loan or credit card if it works out cheaper than using your overdraft.

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.