What is an Overdraft ?
An overdraft is a credit extension given to holders of current and savings accounts when their account balance falls below the amount of the purchase or when their account balance is zero. After then, the account holder can still take short-term withdrawals from the fund. The amount that is "overdrawn" is subject to a fee or interest rate; the overdrawn amount is assigned a limit based on the client and the bank and the connection they have.
When a transaction or withdrawal is authorized by the bank even if there isn't enough money in the account to support it, this is known as an overdraft. In essence, it's a credit extension given by the financial institution upon the closing of an account. Even when there are no funds in the account or not enough to meet the withdrawal amount, the overdraft enables the account user to keep making withdrawals.
An overdraft is essentially a loan that the bank permits its clients to take out up to a certain amount of money. The loan has interest attached to it, and each overdraft incurs fees. An overdraft fee at many institutions might exceed $35.
KEY KNOWLEDGE
Understanding the Overdraft:
A bank will cover a customer's overdraft account payments that would otherwise be declined or, in the case of physical checks, bounce and be returned unpaid.
The borrower must pay interest on the remaining amount of an overdraft loan, just like with any other loan. In an emergency, an overdraft is usually a preferable short-term choice since loan interest rates are frequently cheaper than credit card interest rates. The amount available to pay your checks is sometimes decreased by additional expenses associated with employing overdraft protection, such as insufficient funds fees for each check or withdrawal.
IMPORTANT
According to the Consumer Financial Protection Bureau (CFPB), in 2023, certain financial institutions authorized debit or ATM transactions while the customer's balance was positive, but then charged an overdraft fee because other transactions cleared the system before the debit settled. Customers could not reasonably avoid these unexpected surcharges, according to the CFPB. It instructed the banks and credit unions to cease assessing overdraft fees in certain circumstances, and many of them have devised schemes to reimburse clients who had previously paid them.
Feature of Bank Overdraft:
Types of Bank Overdraft:
An agreement has been reached in advance between the account holder and the bank for this kind of overdraft account. A restriction that can be applied to all payments as well as a daily, monthly, or annual service charge that varies depending on the bank are mutually agreed upon by the parties.
This kind of overdraft happens when a bank account holder spends more than their available amount without getting permission from the bank beforehand or making any kind of agreement; alternatively, if a prior arrangement was made, the overdraft limit may be exceeded.
Advantages of Bank Overdraft:
Disadvantages of Bank Overdraft
Overdraft Protection:
As a service to the consumer, some banks—though not all—will immediately settle overdrafts (while collecting fees, of course.) The consumer has an additional tool with overdraft protection to avoid embarrassing shortages that provide a bad impression of your capacity to pay.
Typically, it functions by tying your checking account to a line of credit, savings account, or other checking account. This source is used to obtain cash in case of a shortage, guaranteeing that you won't receive a returned check or have a transaction or transfer denied. Additionally, it keeps a non-sufficient funds (NSF) fee from happening.
IMPORTANT
The bank may assign a collections agency responsibility for handling an overdrawn account if it is not settled on time.
Frequently Asked Questions:
It is a type of account in which you can withdraw amount even if there is no fund in your account. The bank sanctions a specific limit and your account can go in negative up to that limit. You have to pay interest only on the amount taken as loan.
Overdraft limit account is a running account in which you can deposit/ withdraw amount anytime up to the specified limit. The bank levies the interest on the overdraft amount used by the borrower at predefined rate. The interest is calculated daily and billed/debited to your on monthly basis.
ICICI Bank has launched an overdraft facility, Insta FlexiCash, for its salaried account customers. It is designed to protect ICICI Bank Salary Account customers from missing their Equated Monthly Instalments (EMIs) or cheque bounces due to insufficient funds by providing short-term instant credit.
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