When does this lending option happen? An overdraft occurs when you don’t have enough funds in your account to cover a withdrawal or a transaction, but your financial institution lets you make this transaction.
Basically, this is the extension of credit from the bank that is issued once your account is out of money. It is helpful as it allows consumers to keep on withdrawing cash for various purposes even when the account reaches zero or they don’t have enough finances to cover the withdrawal.
In other words, an overdraft means the financial service providers allow you to borrow a particular sum from them and cover your urgent needs. The bank will charge a fee and some interest on this credit.
What Is an Overdraft?
There is a difference between an overdraft and a regular loan. The first lending option offers a variable sum of borrowing up to a certain limit that you agree to obtain at your bank. A personal loan means a fixed sum borrowed over a particular term with regular monthly payments.
In other words, an overdraft may be obtained when you need an additional sum for withdrawal or transaction up to a certain limit agreed with your financial institution. This option is better utilized for covering short-term expenditures such as equipment purchases or operating costs when you know you can return the debt fast.
Terms
You will need to pay a fee and interest on the sum you borrow as an overdraft. A loan is also repaid with interest but there is a difference between rates as well. This lending option usually comes with higher interest.
Also, the limit of borrowing may be changed by the crediting institution, or the bank might request to repay the debt earlier. If you don’t have sufficient funds on your account, you may request supplemental funds from your bank – in this case, you go “overdrawn”. There are certain fees and finance charges for this action.
Thus, you should review the terms and conditions of this crediting option before you decide if it’s the right solution for your current monetary needs. The loan can be issued for several months or even years as a mortgage is also a type of personal loan.
Amount
What is the amount you may withdraw in overdrafts? Is it different from a regular loan? One of the demands to obtain this crediting product is to have a checking account with a certain bank. Your account balance can be extended to a particular limit if you choose to pay overdrafts.
The sum you may take out daily should be agreed upon with your service provider and you can’t withdraw more than this sum.
At the same time, a personal loan allows consumers to request larger sums for a longer period and have a more flexible repayment schedule. You may obtain a small loan to make the desired purchase, or ask for a mortgage for 25 years to buy a house. Overdrafts usually offer a smaller sum for a shorter period.
Payments Size
Some people ask if they can repay this type of debt in equal portions or installments similar to loans. The answer is that such lending agreements aren’t accompanied by any certain repayment plan compared to a small loan that can be easily covered in regular parts.
Each borrower decides what is the comfortable way of debt repayment for them and how to pay the debt off faster. It may be a lump sum or a particular plan to repay the existing amount together with interest and the fee. Otherwise, you may make several payments if it feels more affordable to you.
The main thing is not to borrow more than you really need as the interest will be paid on the sum you obtain. It can be charged on a daily basis so it’s better to utilize this option only for real emergencies and short-term money disruptions.
The Percentage
Are you looking for a quick crediting option? If you have a checking account with a certain bank, this financial institution may issue this borrowing option, or you may request it from a bank. A consumer needs to understand that this is a form of a loan that should be paid off. If you are searching for long-term lending options, it’s better to compare terms and shop around for the most affordable option.
The interest rate depends on the amount you are issued by the bank. The fees apply when you borrow extra money besides the amount that is left on your account. Financial institutions usually charge about $35 per instance. It means you may be charged numerous fees in a single day.
Types of Overdraft
There are several types of this lending option. We are going to go into detail and describe how each of them works. Generally, this tool can be authorized and unauthorized. With the first type, the bank makes an arrangement with the account balance holder. Thus, both parties know the agreement and the credit limit that applies.
Typically, a fee is charged by the bank for this type of overdraft, and this div may vary among institutions. An authorized overdraft happens when it wasn’t agreed upon beforehand. The reason may be that the account holder has spent more than the remaining balance of his account and has gone beyond the credit limit. It incurs higher fees and is less affordable.
Payroll Overdraft
This lending option means you are eligible for a certain limit of two to three times your salary amount if you have a salary account with the same bank or financial institution. Do you urgently need a particular sum to cover urgent cash needs? What can you do if you can’t wait a few weeks until the next salary day? The answer is to utilize payroll overdraft. If you are employed and have a full-time position with a regular income, you have a chance to use this option.
This is a type of revolving credit and you may request up to 80-90% of your net salary. Pay attention that such an option may be more expensive compared to credit cards and charge about 1-3% a month or 12-30% per annum. Also, not every income account has this option. It depends on the credit history of the client.
Standard Overdraft (Classical)
This option may be secured or unsecured. Collateral or a mortgaged asset is used to back up the debt. Hence, if a client fails to pay the debt off on time together with the fee and the interest, this collateral may be seized by the bank. Review these terms at your financial institution so that you are prepared for these consequences and know how to avoid overspending.
Make sure you repay the outstanding sum to the service provider so that your asset remains with you. A secured overdraft allows clients to get a higher credit limit and withdraw a larger sum for their needs. An unsecured option allows a lower limit but has fewer risks to the borrower. Check your credit history to know which tool is more preferable in your situation.
Overdraft in Advance
Do you need some funds for a few weeks? You may sometimes face situations and obstacles when you simply can’t wait till the next payday. What is the best solution? You may request overdrafts in advance and get funded straight away. It gives you immediate access to supplemental money when you don’t have anything left. Perhaps you don’t even have access to your savings account or emergency fund.
Getting money in advance and paying the debt off later is suitable for many consumers who experience temporary monetary losses. When you face an unforeseen expense, a big-picture purchase, emergency expenses, or any other financial disruptions, you may get this lending option. This is a monetary backup plan but it comes with a fee each time you transfer the funds or withdraw them.
Collection Overdraft
Bank accounts may get sent to collections. It may happen when a client overdraws their savings or checking account and doesn’t deposit the money to repay the overage on time. Then, the bank or the service provider has the right to send this account to its collection department or a debt collector. Hence, you need to make sure you can afford to pay the debt off once you decide to request it.
On the other hand, there are obvious benefits of this option. You get available cash to utilize as you wish. You can manage your funds and take control of unforeseen situations and expenses. Make sure you pay the debt on time and you will keep yourself covered.
Technical Overdraft
If the negative balance of the consumer exceeds the agreed conditions, then extra fees can be charged and higher interest can apply. This is called a technical overdraft. When there is a prior agreement with the provider for this lending option, the amount overdrawn is within the authorized limit. In this case, the interest rate is charged at the agreed rate.
Keep in mind that this option is available for present accounts only. Many service providers and banks let consumers withdraw below the authorized limit only for card transactions. If no interest is set, then no interest will be applied for the amounts of technical overdrafts.
What Do You Need to Know About Overdraft Fees?
There are four types of fees that may apply: a regular fee for an overdraft, an NSF fee, a protection fee, and an extended fee. The first type of fee is charged each time you withdraw extra money. The second charge applies when the bank decides to reject a transaction that overdraws your balance.
Typically, the NSF and overdraft fees are charged in the same amount. The overdraft protection may be offered free of charge by some institutions while the typical fee for overdraft protection is from $10 to $12.50 per transfer.
The final extended fee applies when a client leaves their account in the negative balance for over 5 business days. So, this fee can be charged every 5 days if you don’t repay the debt.
Useful Tips on How to Avoid Fees
You should be ready to pay at least $26 or $30 as a fee for this service. Of course, we know that you would prefer to spend this money on something more attractive and useful. Can you avoid this penalty? What should you do? There are several options:
Pay with Cash
If you don’t make payments with a check, you can forget about stress about when the payment will clear. Utilize your debit card instead.
Balance Your Checkbook
You should keep track of your transactions, balance, and automatic payments. Every consumer has the right to keep tabs on their account by phone, online, or at the nearest ATM at any time of the day.
Use Direct Deposit
You may use this option for your paycheck and gain access to your funds straight away.
Make an Artificial Buffer
You should have a safety net or a cushion of funds in your checking account that you don’t dip into unless a real emergency happens.
Link Your Checking Account to Any Other Account
This is another suitable way to avoid penalties and fees. You may link it to a home equity line of credit or a money market. Hence, if you overdraw your checking account, the funds will be taken out of your second account that is linked to it.
What Is Overdraft Protection?
Some banks and financial institutions provide protection automatically. This tool offers the customer with necessary options to prevent embarrassing shortfalls and disruptions that reflect badly on their ability to pay. Overdraft protection means your checking account is linked to your savings account, a line of credit, or another checking account.
If you face any disruption and can’t repay the debt, this source gets tapped for the money-making certain you won’t have a check returned or a transfer/transaction declined. There is a special fee for overdraft protection and it varies by the bank and by the account.
You need to order this feature or request it from your service provider if you think it will be helpful for you. There are pros and cons of this feature but you should think twice if you agree to pay an additional fee for it.
How Does Overdraft Protection Work?
You can order overdraft protection at your local bank if you have an account there. This service ensures your transfers and transactions are covered even when you don’t have enough funds in your account. The financial institution will automatically move the money you have available to another account that is linked to your checking account.
The average overdraft fee is $33.47 per transaction while its protection will cost you additional money. There are many benefits of this feature. You will be able to conduct an overdraft and have access to funds in challenging times. The cost is usually less than paying an overdraft fee. On the other hand, the transaction may be declined if there isn’t enough money in your linked account.
What Do You Have to Be Prepared for Using Overdraft?
Besides the advantages of getting this lending option and having additional money to cover short-term money gaps, there are also some drawbacks of this decision. You should be prepared for the downsides of using overdraft and consider this option only if you can’t find a cheaper alternative. Firstly, you are demanded to have an active checking account with the respective financial company or bank.
You won’t be able to obtain extra cash if you don’t open an account at a certain bank. More than that, this option is charged with a fee. This finance charge is often higher than alternatives. Getting a small loan or using a credit card may be less expensive and more reasonable. Finally, account holders might end up paying penalties for overdrawing beyond the limit. If you fail to repay the debt on time, your rating will suffer and drop.
How to Apply for an Overdraft?
You can apply for this option using online banking. In this case, here are the steps to make:
- Log in to online banking using your username and password.
- Choose the My Bank Accounts tab.
- Select the relevant checking account.
- Click on the Apply for an Overdraft button.
- Complete the application form with your financial details.
- Make sure all the information is correct.
- A results screen will show the result of your application.
Consumers may repay the debt in installments or in a lump sum depending on their preferences and current financial situation. Make sure you understand all the terms and conditions before you apply for an overdraft.
Some clients accept overdraft protection to ensure their transactions are covered even when they don’t have any money left. However, your credit rating can be affected. Being overdrawn may count against you in case you are planning to borrow funds elsewhere, perhaps for a mortgage. Remember that your credit score is significant, so you should check the reports regularly to prevent mistakes such as finding out how often do collection agencies sue.