UK Accounting Glossary
You have a bank overdraft when the amount of money withdrawn from a bank account is greater than the amount actually available in the account. This sum of money – the excess withdrawal, is known as an overdraft and the bank account is said to be ‘overdrawn’.
An overdraft is a form of short-term borrowing that many of us are likely to be familiar with – in short, it is the act of overdrawing from a bank account. In other words, the account holder creates a bank overdraft by withdrawing more money than has been deposited in the bank account.
If agreed in advance by the bank, your overdraft is essentially a form of short-term loan facility. If the overdraft is not agreed in advance, a penalty overdraft charge may be incurred as a result of having the overdraft.
In addition to any penalty fees, the rate of interest that is charged for an “unauthorised” overdraft (where you have gone over an agreed overdraft credit limit or have overdrawn without prior arrangement) is substantially higher than on an agreed overdraft. The differential between the rates charged for an authorised overdraft and an unauthorised overdraft can be as much as 20%.
Using even the best overdrafts is not a cheap way of borrowing money. Even an agreed overdraft charge is likely to be substantially higher than that available on a structured personal loan.
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This glossary post was last updated: 15th February 2020.