An overdraft is a way of borrowing money from your bank or building society in the short-term. Your personal overdraft can be linked to your bank account, your mortgage or your just one part of your account. If you apply for a personal overdraft, it may for as little as $5,000, or as much as $150,000.
An overdraft is credit for short-term needs only, having the effect of having additional cash being available to you. You can apply for an overdraft or receive one as part of your bank account.
When you have an overdraft you are essentially spending more money than you have available to you – the bank is letting you access more money than you have and for this privilege charges really high interest plus a number of fees.
There are two types of overdrafts you can have – an authorized, or arranged personal overdrafts or unauthorised or accidental overdraft.
As the names imply, authorised overdrafts are arranged with your bank in advance and set at a particular limit.
Unauthorised or unarranged overdrafts are those overdrafts that occur when your bank account drifts into a negative balance, without you knowing, you have allowed the bank to give you an overdraft. So when they give you the cash anyway, the bank is creating a debt in bank account. Fees and interest are especially harsh on unauthorized overdrafts. Usually an overdrawn fee of about $30 will also be charged to your account, plus high variable interest. This may be part of the terms and conditions of your account.
While overdrafts have many benefits if used in the right way:
- You save of potential overdrawing your account for paying bank fees,
- You will never pay fees from dishonouring cheques
- No embarrassment of those nasty declined transactions,
- You have a safety net for emergencies
For most banks you can apply online or over the phone in about ten minutes (so long as you are over 18 years old), and once your credit is assessed, you could have your personal overdraft in about three or four working days.
What is assessed to get an overdraft?
• Your current bank balances
• The value of your assets, such as your car and home, against the amount you owe on those assets
• Evidence of your income (i.e tax return or pay slips)
If you want a small overdraft, like $500, you won’t be charged an administration fee, but those seeking a larger amount of around $50,000 can expect a fee.
Depending on your overdraft, you could be paying up to a $500 every six month, or some banks charge a set high interest rate, like over 16.0% (calculated daily and charged monthly in most cases), which is generally higher than the current variable rate. And don’t forget, this high interest will start to accrue the second you start to access your overdraft.
While you only are charged interest on that portion of your personal overdraft you use, because they are usually charged a variable interest rate.
So while convenient plus they may be, with a bit of budgeting and planning, the need for the costly overdraft may be avoided.