What is an Overdraft
An overdraft occurs when you spend more money than you have available in your bank account. It's a short-term borrowing option provided by banks that allows your account balance to go below zero, essentially creating a negative balance. This can happen through various transactions like cheques, debit card purchases, or electronic transfers. Overdrafts can incur fees and interest charges, so it's important to manage your account balance and spending to avoid unexpected costs.
How does an Overdraft work
An overdraft allows you to withdraw more money than you have in your bank account, up to a certain limit set by the bank. It acts as a short-term safety net for unplanned expenses, but usually comes with fees or interest charges. The idea is to cover the shortfall temporarily until you can deposit enough money to bring the account back into positive territory.
The benefits of an Overdraft
- Rapid relief: where funds quickly become available to cover overdrafts, extra fees are quickly halted.
- Low cost: if the overdraft isn't needed then there will be minimal costs.
- Debt prevention: can avoid the need for arranging further debt that may not always be necessary.
- Growth potential: preserves capital which can be used to fuel growth and business expansion.
- Emergency readiness: a funding line that acts as a safety net during emergencies.
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