Bank overdraft

A bank overdraft is a credit transaction made by a bank to cover payments made by a bank account holder who does not have a sufficient balance for them at any given time.

Making a bank overdraft is common in situations where an individual or a particular company does not have sufficient funds to meet a contracted payment.

Given this situation, the bank assumes the payment of this and pays it. Thus, possible current account overdrafts can be assumed by the client or owner without fear of leaving payments unrealized.

In the sphere of the domestic or daily economy, a bank overdraft can be considered to be a kind of microcredit granted to individuals and legal entities in a timely manner.

It is also a common banking phenomenon for commercial companies that exceed lines of credit previously granted by their bank.

Characteristics of a bank overdraft

There are different ways in which a bank overdraft can be made, in part thanks to the multitude of resources available in modern banking.

Thus, the committed payments can be made by means of a bank card , automated planned payments, through electronic banking or payment instruments such as checks or promissory notes .

This practice is useful for freelancers or SMEs, as they usually do not have sufficient resources to meet their payment commitments on time.

In this way they have the ability to credit payments to suppliers or periodic receipts, with the help of their bank.

Requirements for granting a bank overdraft

The costs for the client that their bank covers their pending payments despite not having a balance depend on the contract that both parties have for the opening of their account. Regarding this, it is important to read the contract and review these conditions well to avoid bulky costs.

Usually each entity offers a range or margin of money to cover its customers, taking into account its characteristics (direct debits and receipts, monthly payroll, other payment commitments …)

The overdraft fee will be calculated taking into account these aspects, together with the maximum allowed overdraft time or the amount loaned. At the same time, the application of a certain interest rate is common .


by Abdullah Sam
I’m a teacher, researcher and writer. I write about study subjects to improve the learning of college and university students. I write top Quality study notes Mostly, Tech, Games, Education, And Solutions/Tips and Tricks. I am a person who helps students to acquire knowledge, competence or virtue.

Leave a Comment