how does the overdraft work?

Answer 1

You spend more than you have in the account and instead of bouncing checks, the money comes out of another account or from the bank (temporarily).

Answer 2

What everyone has said is true; however, I have never seen the interest rate cheaper on Overdraft protection than on other loans. The reason being is because it is an unsecured line of credit. The bank I used to work for charged 21% on their Overdraft. If you have money in a savings or money market account then I would check with your bank about using that as your overdraft protection. That way you don't have to pay the bank back any money.

Answer 3

As the others have said its when you can spend more from your account than you actually have in it. But you will need to arrange this with your bank first, or they will hit you with high interest repayment penalties. The same applies if you go over the limit of your overdraft. For example, if you arrange a €500 overdraft with your bank, but end up spending €600, you could be charged 1 rate for the €500, and an even bigger rate for the €100 that brought you up to €600.

However, if managed correctly, it can work out cheaper that a loan, cause you can repay it quicker and with some banks the interest repayments on a O/D could be cheaper too.

Answer 4

What is a bank overdraft?

An overdraft is a service provided by a bank which allows a customer to continue to write cheques or make other withdrawals from an account even when there is not enough money in the account to cover them. In effect, an overdraft is a form of credit, which attracts interest charges for as long as you are overdrawn.


It is not always easy to predict how much an overdraft will cost you. Most overdrafts are charged at variable interest rates; that is, the rate charged goes up and down depending on what base interest rates are at the time.


Different banks have different charging periods and policies. Some of the alternatives are: arranging a monthly management fee, a charge only on the overdrawn balance; a charge for every cheque and transaction made during the period when your overdraft is in use.


What are the advantages of an overdraft?


An overdraft allows the customer to overdraw on a current account up to an agreed limit and subject to an annual review. A variable interest rate applies, and so this form of credit is only suitable for a short period of time.

Answer 5

ok an overdraf is a "small" temporary loan by the banks to you that is repayable on demand.
how it works is like this:

your £800 O/D
you get paid £500
total available for withdrawal £1300

your £800 O/D
you spend £500
total available for withdrawal £300

you spend £300 out your £800 O/D
leaving you with £500 O/D available
YOu then pay £600 into your account
making your balance £1100
(from that £600, the bank will automatically put back the £300 you used to go into O/D hence reducing what you would have say if you were to close the account same day ie £300 because the £800 will always belong to the bank

what ever you do bare in mind it is repayable on demand and you must pay interest on it (unless its got an interest free period) so you should spend it with great care especially if you know you don't have the funds to cover it if they ask for it back

also O/D are recorded on your credit report and if you couldn't pay it all at once you'd be paying by agreement with the bank and that too is record, so use wisely

Answer 6

Its an emergency loan by the bank to cover your checks when your account ran out of fund. The loan is based on the availability of assets from your other bank accounts linked to your checking account..i.e. savings, 401k, etc. As long as there is enough there, then the bank is happy. You still need to pay the loan plus a fee for each check issued.

Answer 7

they give you free money you spend it and evermore you not got your own money just theirs