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Over Draft
An overdraft is a service that lets you spend more money than you have in your bank account, up to a pre-approved limit, turning your account balance negative. When you overdraw, you are essentially borrowing money from your bank, and this loan typically incurs fees and interest charges, making it a form of short-term credit. An overdraft can be authorized with your bank or may happen unintentionally if the bank covers a transaction when you lack sufficient funds. How an Overdraft Works
- Authorization: You arrange for an overdraft facility with your bank, agreeing to a certain credit limit.
- Spending: If you make a transaction that exceeds your available funds, the bank pays it, and your account balance goes into a negative amount.
- Fees and Interest: You will be charged interest on the borrowed amount and potentially other fees, depending on your agreement and how long the overdraft lasts.
- Repayment: When you deposit funds into your account, they first go toward reducing the overdraft balance.
Types of Overdrafts :
- Authorized Overdraft: This is a pre-agreed facility with the bank, allowing you to overdraw up to a specific limit.
- Unauthorized Overdraft: This occurs if the bank pays a transaction when you don't have an overdraft agreement, or if you exceed the approved limit. Unauthorized overdrafts usually come with higher fees and more severe penalties.
Overdraft Protection :
- Some banks offer overdraft protection, which links your checking account to another account, like a savings account or a credit line. If your checking account balance goes negative, funds are automatically transferred from the linked account to cover the shortfall.
Why Use an Overdraft?
- Temporary Cash Flow: Overdrafts are best for managing short-term, temporary cash flow issues.
- Convenience: They allow for continuous transactions, preventing a payment from being declined due to insufficient funds.
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