The bank will approve you to get additional money from them if you have a current account and there’s not enough money in it. It’s called an overdraft. The bank will sanction a loan for a specific amount for a specific period, and you will be able to spend up to that amount. You will be responsible for your Overdraft and the Interest attached to it. Even though overdraft interest rates can be high, you only pay interest on the money you use. let us see about What happens if you exceed the overdraft limit?
What’s Overdraft
An overdraft occurs when your bank account’s transactions surpass your balance. In other words, your balance will be negative. Overdrafts are a problem since they are expensive. They may accumulate over time. The fees allotted to overdraft can be charged the moment you surpass your transaction limit and it could lead to charging multiple fees in a single day.
Types of overdraft;
When you have an overdraft, your bank pays for the transaction and charges you a fee. Authorized and unauthorized overdrafts are the two sorts of overdrafts.
•Authorized overdrafts: These are sometimes known as ‘arranged’ overdrafts because they are pre-arranged. An agreement will be made between you and your bank regarding your spending limit.
•Unauthorized overdrafts:
This is a scenario where there is no agreement between you and your bank before spending more than the money in your account. One example is exceeding an approved overdraft limit.
What’s the essence of Overdraft?
As long as you have a current account, you can seek an overdraft to use it. The bank may issue you a short-term or long-term loan if it feels you will be able to repay an overdraft.
There’s a limit for every overdraft. The amount you will receive from the bank will depend on how you have managed your account in the past.
For instance, the bank will know how committed and consistent you are in paying your bills on time. An overdraft may be difficult to obtain if you have a poor credit history.
The bank will set a repayment deadline. Your overdraft is cleared when funds are placed into your account.
The overdraft offered to you by your bank has an agreed time for repayment. The moment you default in fulfilling your agreement, it will hinder you from getting future loans.
What could be the Limit of Overdraft?
It’s simply the maximum amount you’re expected to withdraw from your Bank.
For example, suppose you had a $10,000 bank account with a $1000 overdraft limit. It means that you can spend up to $11,000, but you won’t be able to withdraw or demand further loans if you exceed your limit. Nevertheless, interest will be charged on any overdraft limit.
As a result, you should think about whether you want to use overdraft restrictions, as they can be just as expensive as ordinary overdraft costs.
What happens if you exceed the overdraft limit
It’s called an ‘unauthorized’ overdraft if you go overdrawn without first getting permission from the bank. Such action could prevent you from acquiring more loans in the future.
Cheques and other payments from your account, such as direct debits, are typically returned (bounced) by the bank.
The bank might terminate your Overdraft if you have an initially approved overdraft and you intend to use more over the limit.
Request assistance from the bank. If you can’t pay for things because you don’t have an overdraft, they must assist you. They may, for example, waive costs or assist you in resolving an overdraft situation.
How do you pay back an overdraft?
Overdraft acquisition is not for the faint-hearted. It’s a staggering loan that needs to be paid as soon as you have the opportunity. An overdraft, unlike loans or credit cards, has no repayment plan, so you are responsible for paying it off.
Calculating how much you owe on an overdraft is the first step. Draw out a budget to see what you earn and spend each month once you have the numbers in front of you. Calculate how much you can afford to spend toward your overdraft and establish a deadline for paying it off.
Consider putting your savings in a low-interest account to pay down your high-interest loan. It may sound contradictory, but with interest rates at historic lows, having an overdraft will almost certainly cost you more than the money you may make on savings.
How to maintain your Overdraft limit;
The best possible way to not exceed your Overdraft limit is to manage your transactions like; cash withdrawals, standing orders, direct debits, etc. Make effort to monitor the money in your account and always look into your bank statements once you get them from your bank
If you suspect you’ll need to withdraw more money than your account allows, contact your bank right once to make arrangements.
Conclusion:
Overdraft is a short-term loan that businesses use to cover a cash shortage or necessity. It is important to remember that such a facility has a significant cost and should only be utilized as a stop-gap measure or an emergency activity rather than a regular funding activity.
FAQs
What does it mean to have an overdraft?
A bank provides an overdraft service. The customer is trusted by the bank to repay the overdraft. Overdraft fees vary per bank. Overdrafts are paid by banks for a reason.
According to studies, people are willing to pay a fee to have crucial checks, such as mortgage payments, made.
One way of avoiding additional charges and harassment is to pay the check in the Overdraft before or at the stipulated time.
People may also want their debit card or ATM transactions paid to avoid humiliation or to assist with unexpected cash flow problems. To avoid unnecessary insult, customers may prefer to pay up their debit card, ATM transactions, or aid with unanticipated cash flow.
Are there chances of a customer not paying an overdraft fee?
Of course, customers can avoid paying overdraft fees by linking the current account to the savings account.
If you have an overdraft, money will be transferred from your savings account to cover it.
