An overdraft is a way of borrowing money on your current account that your bank or building society may allow so you can to cover short-term cash-flow problems when there is no money in your account. You should always try and avoid going over your agreed overdraft, as the resulting penalty charges can cost you a lot of money.
Some banks and building societies have an overdraft facility as part of their current account but, if yours does not, you can ask for an authorised overdraft limit which will allow you to borrow up to an agreed limit.
Like most borrowing systems you will usually have to pay interest on your overdraft, your bank will tell you how much this will be, but be aware that your bank has the right to demand you pay back your overdraft in full at any time if they are concerned about your ability to repay the debt.
If you go overdrawn without your bank or building society’s permission, or go over your authorised overdraft limit, the bank or building society are likely to charge high prices and refuse to pay cheques (known as bouncing) until you have repaid your overdraft.
These charges usually come in the form of a fee for every transaction you have made over your agreed overdraft limit, and a higher interest rate on the money you have borrowed over the limit.
You should try and avoid going over your overdraft, as the resulting penalty charges can cost you a lot of money and build up over time.
For a further explanation on overdrafts, follow this link, and for a guide on how best minimise the cost of your overdraft, click here.
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