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If you need to make a payment or transfer, but there are not enough funds in your account, a bank overdraft can be your salvation. This financial instrument, although not widely known, can help in various situations. However, it is important to understand how to use it correctly, as an overdraft has its own costs and possible consequences. In this article we will tell you what a bank overdraft is, how to use it correctly and what results it can lead to.
What is a bank overdraft?
A bank overdraft is a loan provided by a bank as an additional balance in your account. In other words, when your account balance reaches zero but you continue to spend, an overdraft is activated. This creates a negative balance in your account, on which interest is charged. This option allows you to make transactions even though you have run out of money. Of course, it has a limit, which depends on the agreement you have with your bank.
The option allows you to continue making purchases or transferring funds even if there is no money in your bank account. At the same time, the overdraft prevents cheques written when there are insufficient funds from being rejected. A current account overdraft is a small loan provided by the bank when you need it. Keep in mind that if you use your savings account and want to spend it in overdraft mode, this money will be debited from your current account and it will reflect a negative balance.
Given that overdraft interest is not as expensive as other financial alternatives, in many cases it is preferable to resort to this product if you run out of money.
This is especially advisable when the financial gap is only a few days and you intend to cover the negative balance as soon as possible. This way, you can get instant liquidity without any formalities and cover your debt by simply making a deposit or receiving a transfer.
Disadvantages of using a bank overdraft facility
The main disadvantage of overdraft is the negative balance agreement, which is often used unintentionally or unknowingly. One possible case is wanting to make a transfer, and in the process selecting the current account instead of the desired one. This leads to a spending spree, leaving a negative balance. It may also happen that we forget about the need for automatic debiting, and then the amount exceeds the limit, and part of the expenses will be covered by the authorised overdraft. The disadvantage is that we not only accrue interest, even if it happened only for one day, but also charge bank debit and credit tax for cash flow transactions from the current account.
How do I find out what the overdraft limit is on my account?
There are several options that your bank gives you to find out your contractual limit. If you use your home bank regularly, you can check this information right there in the Accounts or Account Enquiries section. You can also check it over the phone by calling your bank's contact numbers or visiting a branch in person. Banks also have a FAQ section on their websites where you can find out what your overdraft limit is and how to find out yours. We recommend that you try to find out using one of the remote contact methods offered by the bank, as this information is very easy to find. Overdrafts at the bank incur additional charges, so it's important to know if you are utilising this quota.
How much does the bank charge me for an overdraft?
The cost depends on each bank, the type of account and even what package you have. To give you a rough guide, interest on overdrafts on current accounts is between 60 and 75% of the nominal annual rate. If you factor in total finance charges, this interest can rise to 100% of the nominal annual rate. For accounts with a mortgage guarantee, the overdraft fee drops to 52% of the nominal annual rate. Banks generally charge this late fee, meaning it is reflected in your transactions in the month following the overdraft facility.
In case you have been wrongly charged interest on your overdraft, but you have never had a negative balance - there is no need to panic. The account that did have a positive balance was a savings account, but there may have been some sort of transaction with your current account that resulted in an overdraft charge and the system automatically generated what is known as a compensation between accounts, transferring the balance from one account to another.
Another key point is to realise that technically a savings account cannot have a negative balance, as an overdraft is a product linked to current accounts. However, many banks have what is known as a single account, where a savings account and a current account are in a sense the same product. If you have indeed been charged an overdraft fee, but you believe this is an erroneous charge, you should contact your bank's customer service centre as soon as possible.
How can I avoid overdraft charges?
To avoid overdraft charges, follow a few simple tips. Firstly, try not to use your current account if you have a balance in a savings account. This will help minimise the likelihood of an overdraft. Regularly check your account movements so that you always know your balances and recent expenses, and avoid having a negative balance in your current account. Before making a transfer or paying a significant amount of money, make sure you have enough funds in your account.
You can also ask your bank to reduce your overdraft limit. Remember that an overdraft can be useful if you use it wisely and realise that it is a loan from the bank that needs to be repaid. Otherwise, it can lead to more serious financial consequences. Managing your accounts carefully and using credit facilities wisely can help you avoid unnecessary overpayments and debt.
Conclusion
A bank overdraft can certainly be a useful tool when you need to make payments or transfers when there are insufficient funds in your account. However, it is important to understand that this is not a free resource, as it entails the accrual of interest and additional fees that can increase significantly if used carelessly. By realising that an overdraft is a kind of loan that needs to be repaid in a timely manner, you can avoid unnecessary overpayments and debts. Managing your finances carefully and using an overdraft only in extreme cases will help you maintain stability and avoid serious financial consequences.
FAQ
You can only do this if you have a current or single account and it has an overdraft facility. Remember that you cannot overdraft on a savings account.
You can find out the overdraft limit via Internet Bank, in the section ‘Accounts’ or ‘Account enquiries’. You can also contact the bank by phone or visit a branch.
Interest rates on overdrafts range from 60 to 75% of the nominal annual rate and total finance charges can be as high as 100%. Accounts with a mortgage guarantee may have reduced rates.
Only by making a deposit or bank transfer to cover the overdraft on your current account. You can also make a transfer between your own accounts.
The bank should only charge interest on the debit balance for the days you had an overdraft, plus tax charges arising from the movement of funds in your current account.
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