What is an overdraft

When the balance amount in the bank is less than the amount that is withdrawn from the account such an amount is called the over draft. The account will then have a negative balance, and will mean then the account provider is giving credit.

There is at times a prior agreement between the bank and the customer that provides an overdraft facility. If the amount withdrawn by the customer is within the agreement then the interest is charged normally at the agreed rate. However if the amount so withdrawn exceeds the agreed amount then a fee will be charged along with a higher rate of interest.

Most of the times the over drafts occur due to a customer being negligent of his account balance. It could also happen if you forget the bank delay in check deposits etc. At times even the banks alter their policies so that they can gain the maximum fees on over drafts.

Some people feel that over draft charges are very unethical as far as electronic transfer of money is concerned as these transactions are authorized by the bank. Some of the banks allow the consumers to draw in excess of what they have. This practice is not liked by some as they feel it is a form of predator lending.

The traditional form of an overdraft was a loan but however the modern form of over draft is no longer considered to be a loan because it is in the hands of the bank to refuse over draft facility. At times like in countries like UK bank overdrafts are also issued without any interest but only with a basic fee that is charged.

The fee that is charged by these bank scan vary. In the USA there is something called the over draft protection which advances money for an attempt to withdraw money from the accounts which do not have the sufficient balance. Such a service is also used to cover checks and in that case is used to prevent the checks from bouncing.

However some people find the over draft cheaper than the other forms of credit like loans etc. So if an overdraft is authorized then it is a very cost effective way of borrowing. Yet if the withdrawal exceeds the authorized amount then a rate of interest will be charged for unauthorized over draft. The amount that can become your authorized over draft can be revised depending upon your relationship with the bank.