Overdrafts Explained

By choosing a current account with an overdraft facility you will be able to temporarily extend the funds you can withdraw beyond the balance you hold in credit. The maximum amount you are able to withdraw beyond your available credit is known as an overdraft limit and this figure must be agreed with your current account provider. When you draw funds from your overdraft your account will show a negative balance.

Some current account providers offer a small interest free overdraft (typically a couple of hundred pounds) as part of their standard package. However the majority will charge a fixed interest rate on any money borrowed. Some may also charge an arrangement fee when the overdraft facility is enabled or an annual maintenance fee. Providers will only charge interest on the amount you have withdrawn from your overdraft, not the amount you are able to withdraw.

It is always better to request an overdraft facility or an extension of an existing facility if you think you are likely to need supplementary funds. This is known as an authorised overdraft and any additional money borrowed will attract the advertised overdraft interest rate. However if you withdraw money above your authorised overdraft limit you are likely to incur penalties to your account such as heavy fees and a dramatic increase in the interest rate applied.

Before committing to a current account, check whether there are any fees associated with using the overdraft facility, additionally make sure you are aware of the interest rate applied to any money you borrow. You must also check you are happy with the agreed overdraft limit, whether this can be extended in the future and also whether the overdraft facility is applied to the account automatically or whether you need to request its activation when you want to use it.