Overdraft is a special form of providing a short-term loan to a bank client in case when the amount of payment exceeds the balance on the client’s account. In this case, the bank deducts funds from the client’s account in full, that is, it automatically provides the client with a loan in excess of the balance of funds. As a result of an overdraft, a bank forms, in the accounting language, a debit balance.
The right to use an overdraft is granted to the most reliable customers of the bank under an agreement in which the maximum amount of the overdraft is established, the conditions for granting a loan under the overdraft, and the procedure for its repayment. Overdraft differs from ordinary loans in that all amounts received to the client’s current account are sent to repay the debt.
Example of overdraft
For example, you are the owner of a debit bank card to which your income (salary, other income) is transferred monthly.
Let’s say that the monthly income to your account is 50,000 rubles. You spend money, and after paying for the next purchase, you have 2000 rubles left on your account. But there is an urgent need to buy a thing worth 5000 rubles. 5,000 rubles are debited from the card, while your account has minus 3,000 rubles. However, you can use this method of lending not for any amount, but only within the overdraft limit.
What is an overdraft limit?
This is the amount of money that you, in the absence of funds in your account (usually tied to a debit card), can “borrow” from the bank. Such a limit in banks is set differently. For example, such a limit may be tied to your monthly income transferred to the card and make up a percentage of the specified income. The limit can be set in a fixed amount. It should be remembered that if you used a bank overdraft, the bank will write off the funds received in your account primarily to pay off your “debt” (that is, to pay off the balance of the account with a minus sign.
What is a debit (settlement) card with overdraft?
A debit or payment card cannot be issued to you by the bank before opening a bank account, to which, as they say, the specified card is “tied”. Overdraft is the crediting of your bank account in the absence of funds on it. A debit card is just a convenient tool for carrying out operations with the funds in the account: if you have a card, you do not have to visit a bank branch to withdraw money, you can use your card to pay for goods and services purchased, withdraw cash in ATMs.
A settlement (debit) card is intended for transactions by its holder within the amount of money (spending limit) established by the credit organization – issuer, the calculations of which are carried out at the expense of the client’s funds in his bank account or a loan provided by the credit organization – issuer to the client in accordance with the bank account agreement if there is insufficient or no money in the bank account (overdraft) (“Regulation on the issue of bank cards and operations performed using payment cards” (approved by the Bank of Russia on December 24, 2004 No. 266-P) (in edition of November 15, 2011, as amended on August 10, 2012).
Bank overdraft fee. Interest
Interest for overdraft is usually higher than, for example, for a consumer loan. In addition, banks usually charge also fees. For example, a commission for servicing the overdraft limit, a commission for the issue of cash, etc. can be set. The legality of individual bank commissions is a separate issue.
Fines may be imposed for late repayment of an overdraft.
The condition of overdraft, overdraft limit, interest for use, penalties are stipulated in the contract with the bank. Therefore, it is recommended to study all these conditions so as not to see one day an extract from which it follows that you already owe the bank an amount equal to several of your salaries.
Recall that if there is no overdraft clause in the contract with the bank, but the bank actually provided you a loan in the absence of funds in your account, you are not required to pay interest at the rate set for the overdraft
Even if you have already signed an agreement with a bank, under the terms of which you are granted an overdraft with a certain limit, nothing prevents you from refusing to receive an overdraft. To do this, it is necessary to send a corresponding rejection application to the bank.