Good to borrow or bad – everyone decides for himself. And if all or almost all lived on the principle of “never borrow” and “credit – for nothing,” then banks would lose one of their most profitable active operations. And, perhaps, overdraft is just what helps to gradually “tame” those potential customers who are not disposed to take loans.
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Summary and Related Links
- What is overdraft?
- The difference between overdraft and credit
- What are the main subtleties of overdrafts provided by banks on virtual cards?
- What is a blank salary card overdraft?
- Overdraft for business
- Penalty, fine and penalty for debts
What is overdraft?
From English, “overdraft” is translated as “short-term loan” (over – over, draft – project). Any bank without hesitation will tell you that it is provided exclusively to a “trustworthy client in excess of his current account balance with that bank within the limits of the predetermined amount”. The bank, as it were, gives a little loan. In practice, this looks like an overspending of money on a card account, which can be a useful reserve for unplanned cases. That is, the bank trusts the client not only by issuing a credit card, but also provides a certain amount of credit, which can be used in force majeure circumstances, but nothing more.
Note: if you are interested in information on overdraft for legal entities, then you need to visit the site – Prostobiz.ua – a guide to the world of business finance
The difference between overdraft and credit
It turns out that overdraft is the simplest type of inappropriate bank loan for a short period . In fact, it is often incomprehensible to the client how the overdraft differs from the loan. Some banks excitedly talk about the delights of a credit card, others offer an overdraft card, and others – both together. Of course, overdraft and credit are two different products.
Overdraft Bank immediately sets a client similar to a credit limit. At the same time, overdraft cannot be a synonym for a credit limit. It is rarely big. Banking credit expert on a special formula for assessing credit risks calculates how much can be guaranteed to get back from the client. Most often this is the size of the salary, which is regularly paid to the card account on a certain day. Accordingly, the bank sees this periodicity, and these amounts, and as a result is able to predict the next flow of funds, and therefore the return of the amounts that it provides to such a client. From this it follows that overdrafts appear just on the accounts of those plastic cards that receive salary money. It happens that for some kind of insurance, it turns out, say, a tenth of the salary that is transparent to the bank,
“Overdraft is issued to corporate customers of the bank who receive salaries in dollars or euros,” said the operator of the Raiffeisenbank information center. The operator refuses to talk in detail about how the overdraft amount is determined and the extent to which it is provided: “This is decided by the loan officer. Overdraft depends on the size of the salary, the rate and amount of replenishment of the account.” And it would seem that you need to rejoice – no loan requests, no additional evidence of solvency, no guarantees from the client.
But the overdraft has one serious drawback – the interest on it is much higher than on a regular loan. And it must be repaid immediately and in full, and not in parts.
To find out how much loans cost in Ukrainian banks today, you need to visit the following sections on our website :
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In the West, overdraft terms range from several months to several years. And banks also require full repayment of the loan for the period provided. In parallel, an unofficial periodic examination of the client’s affairs is carried out. And if suddenly there are at least some doubts about his solvency, the contract is immediately terminated. Overdraft is always and everywhere inextricably linked with the current account.
An overdraft differs from a regular loan also in that it is initiated directly by the bank itself, that is, the client himself cannot ask for it. Not everyone, by the way, knows that everyone has the right to refuse a “gift.” This is also one of the differences between an overdraft and a loan. Moreover, the refusal cannot entail any consequences in the form of fines against the client and similar troubles, and all overdraft conditions must certainly be stipulated in the bank’s contract with the depositor. In any case, the client is required to inform about the presence of an overdraft on the account and the terms of its repayment.
Another difference between an overdraft and a loan can be considered that a loan is issued with execution of a mass of documents confirming the solvency of the client. In addition, it is still important for the bank that a certain amount of money, adequate to the loan amount, takes place in the current account. For an overdraft, it’s enough that there is a movement in the account in a ratio of about five to one. And, perhaps, another important difference can be called that the repayment of a regular loan does not guarantee a new one, but the overdraft is renewed along with the return of the debt.
However, it is sometimes pleasant to use overdraft funds – especially if the receipt of salary in the account is delayed.
It must also be borne in mind that overdraft is “permitted” and “unresolved” . It depends on its size and type of card. Accordingly, the size of the allowed overdraft is included in the spending limit on the card and is taken into account during authorization. Unresolved, in turn, is one that already exceeds not only the established limit, but also the overdraft limit. In accordance with generally accepted rules, in this case the customer is called and reminded that he did not get into his own money and is asked to pay off the debt. The problem is solved by replenishment of the account.
As experienced banking experts advise, first of all, you should definitely pay attention to the repayment scheme offered by the bank. As a rule, this is a one-month period, after which interest is included, and rather big. So, if you are sure that some funds will be credited to the card exactly before the end of the interest-free repayment term of the overdraft, then you can easily not worry about the fate of the expected money. But in general, it’s better to pay off all at once, as at least some funds will appear. I climbed into the overdraft – pay off before the end of the month. Completely. Such behavior may even lead to the fact that the bank on its own initiative will increase the size of the overdraft, which eliminates the need, in which case, to ask for an additional loan.
However, the temptation to spend the money provided by the bank is so great that even those who never borrow are used by the overdraft. Therefore, overdraft can be called a kind of doping. For plastic card holders, it simultaneously becomes a temptation to take a much more serious loan.
But the loan itself is already given for a certain period, and the scheme for repaying it, in contrast to the overdraft, is such that the amount is divided, as a rule, into equal portions and distributed over time. Again, there are different loans – with a restored credit limit or one-time. You can spend the loan immediately and pay in installments. The credit line is repaid for the repaid portion. Overdraft is dangerous because it cannot be repaid in parts, like a loan.
So, someone likes overdraft, someone doesn’t. An obvious plus: the card is not blocked at the end of its own funds, and minus – its owner eventually gets used to it and forgets that he is not spending his own.
It remains only to remember the most typical signs of an overdraft – a very short-term and transient character, high interest rates that stimulate it to be returned as soon as possible, and powerful punitive fines. In addition, the interest on overdraft is calculated daily on the outstanding balance. The rest of the overdraft is a pretty attractive product. It allows you to quickly solve the problem of financing short-term debt in periods when expenses temporarily exceed the receipt of money in the account. And you have to pay only for the actually used amounts. And here you can be especially careful sometimes to forget about your principles not to make debts. Although it is not necessary to use the provided overdraft. It’s just sometimes nice to know that there is always a reserve.
What are the main subtleties of overdrafts provided by banks on virtual cards?
In what cases can a virtual card holder use an authorized overdraft without suspecting it? What determines the size of the allowed overdraft limit? When can a virtual card holder accidentally exceed the allowed overdraft and use an unauthorized overdraft?
The mode of a card account for a virtual card is no different from a regular payment card, therefore, the overdrafts provided on such an account also do not differ and their size depends only on the creditworthiness of the client and the willingness of the bank to provide an overdraft.
Of course, if the tariff package of a virtual card provides for annual service and an overdraft is installed on the card, then it is possible that a person gets into an overdraft without timely paying this commission to the bank, but paying for a service that costs more than he has funds on the card , without the presence of an overdraft is impossible. An unauthorized overdraft may also occur, regardless of whether the limit for the allowed overdraft is set. One of such cases may be the debit of funds from the account when the transaction was made abroad, and such an overdraft may arise precisely because of the difference in exchange rates at the time of purchase and the moment of debit of funds from the card account, and up to two can pass between these two events weeks for which the course may change significantly.