Definition
Overdraft
An overdraft allows you to spend more than you have in your bank account, up to an agreed limit. Arranged overdrafts are agreed in advance; unarranged overdrafts occur when you exceed your balance without an agreement and typically carry higher charges.
Example
Your bank account has an arranged overdraft of £500. Spending £200 more than your balance uses £200 of your overdraft facility.
Common misunderstandings
- Overdrafts are a form of credit — they are not free money and interest is charged on the amount used.