What is an overdraft?

Published on 5 December 2016 by Raffick Marday

What is an overdraft?

Is when you spend more money than you have in your bank or current account? There are two different kinds of overdraft facilities.

An Authorised Overdraft –

This is when you have a set limit pre-arrange with your bank that allows you to go up to. Depending on the bank account company you will usually pay interest or a set monthly fee for using the overdraft facility. With banks now becoming more competitive you can get £100 interest-free overdrafts with no additional charges.

An Unauthorised Overdraft –

When you have not agreed an overdraft facility with your bank in advance or cause it to go over the limits of an existing Arranged Overdraft. Banks have different service fees and interest rates that apply to an Unarranged Overdraft.

Using an overdraft facility

If you are looking to borrow a small amount over a short period of time an overdraft may be a solution. If you need to borrow over a long period of time then an overdraft is not an effective solution as the charges may come with a higher rate of interest than some loans providers.

Bank accounts like the NatWest's Current Account Plus offer a £100 interest free overdraft, even if your current account is always in credit it is a free option to have an overdraft facility for emergencies and will protect you from fees and charges for unauthorised borrowing if you ever accidentally overspend.

Dependant on an overdraft facility?

If you are dependant on an overdraft facility or often go overdrawn without authorisation then it is in your best interest to shop around to see which bank account is offering the best deal on your current account with an agreed overdraft facility.

This could reduce your interest being charged or overdraft charges. Such as the Santander Preferred Overdraft Rate Account you get 0% EAR (typical) overdraft for 12 months where Santander will match your previous overdraft up to £5,000 (depending on your circumstances).

By switching to an interest-free overdraft account, you could get cheaper borrowing and may be an alternative to getting a personal loan.


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