Overdraft

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Definition

An overdraft on a bank account is when more money is withdrawn than the account currently holds. 

Overdrafts are a temporary loan from the bank to help people when they need extra cash to cover a bill or a purchase. Overdrafts can be pre-arranged with a bank to allow you to be overdrawn (borrow) past the amount that is already in your bank account. Most banks will charge either a monthly or daily usage fee as well as interest charges. 

Most banks will only allow you to borrow up to a certain amount. They offer this service because they make money on it, by charging interest and fees and the money borrowed.

The more you use it, the more money the bank makes.

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LAYMEN TERMS

Overdrafts are a temporary loan from the bank to help people when they need extra cash to cover a bill or a purchase. You must apply for an overdraft from the bank just like any other loan.

However, people should be aware that continuously using an overdraft and not repaying the full amount can lead to legal action taken by the bank which will affect your credit rating.

Banks can also remove the overdraft at any time if it is continuously not paid on time. 

HOW DOES THIS TERM APPLY TO YOU

If you are a little bit short on money to pay your rent one month and have an overdraft on your bank account you can dip into the overdraft to pay what you are short. This will not affect your credit rating nor will it upset your landlord that you couldn’t pay your rent.

Making sure you pay back the overdraft amount as soon as possible will also lower the fees you pay to the bank and the interest on the loan.

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