An overdraft is a facility that allows you to spend more money than you have in your bank account up to an agreed limit. It acts as a short-term borrowing solution and can be useful for covering temporary cash shortfalls.

Arranged Overdrafts (Authorised)

This is an overdraft limit agreed with your bank in advance. You are allowed to borrow up to this limit at any time.

Banks typically charge interest on the amount you borrow. Some may also charge a monthly fee.

Unarranged Overdrafts (Unauthorised)

This occurs when you spend more than your account balance without an agreed overdraft, or you exceed your arranged overdraft limit.

The fees for unarranged overdrafts are usually higher than for arranged overdrafts. These can include higher interest rates and additional charges

Overdraft interest is usually quoted as an Annual Percentage Rate (APR). This represents the cost of borrowing over a year and includes any fees and charges.

Some banks charge daily fees for the use of an overdraft, while others may charge a monthly usage fee.

If a payment takes you beyond your overdraft limit or is refused due to insufficient funds, the bank might charge a penalty.

You should regularly check your balance and keep track of your spending to ensure you stay within your overdraft limit.

Many banks offer text or email alerts to notify you when you are close to or have entered your overdraft.

Try to reduce your reliance on your overdraft by budgeting more effectively and building up savings to cover unexpected expenses.

Check your overdraft terms periodically as banks can change interest rates and fees. Also, shop around to see if there’s a better overdraft deal available elsewhere.

If you find yourself frequently using an overdraft, consider other forms of credit that may be cheaper, such as a personal loan or a credit card with an interest-free period.

Bank overdrafts can act as a valuable buffer when you have an unexpected expense or receive less income one month. The are main advantages are listed below:

• Provides a buffer for financial emergencies.

• Flexible repayment – no fixed monthly payments.

• Often quicker and easier to arrange than a loan.

Bank overdrafts are meant to be a short-term credit solution and not intended as a constant debt. If you run a constant overdraft, your income will be sucked up straight away and it can make it difficult to budget effectively.

• Can be expensive, especially if unarranged.

• May lead to a debt cycle if not managed properly.

• Potential impact on your credit score if frequently used or exceeded.

If you find that you can no longer manage your overdraft facility and pay your essential bills, you should get free debt advice as soon as possible.

A debt adviser will usually recommend that you open up a new basic bank account without an overdraft to divert your income and regular payments to.

If you progress a formal debt solution, a bank account with an overdraft is usually frozen so it's essential to plan ahead and get your banking sorted before you proceed.

If you are suffering financial hardship and know that your wages or benefits are about to be paid into an overdrawn account, you can make a formal request to the bank to release your funds. If you do this, your bank might decide to close your account or restrict your overdraft facility, it's important to get advice on this before applying.