Overdraft facility – what is this and when can it be used?
An overdraft facility describes the monthly credit limit of current accounts. Requirements for receiving an overdraft facility is a regular receipt of money, e.g. a salary. Whether bank customers receive the opportunity to overdraw their account, is the bank’s decision and might have to be negotiated with on an individual basis.
However, some account types are generally excluded from an overdraft facility: basic accounts or current accounts for minors normally do not allow their owners to spend more money than the available credit. Therefore, these customers always need to have enough money on their account in order to make payments or withdraw money.
Height of the overdraft facility
The height of your overdraft facility will normally be calculated based on your regular receipt of money. For example, many banks take the net salary as reference point and multiply this amount by a certain factor. As the process of calculating the overdraft facility can differ from bank to bank, you should inform yourself about the height of it before opening the account.
Normally, the height of your overdraft facility can be adjusted at any time – either by yourself or by your bank.
Of course, your bank does not grant you an overdraft without additional costs. For every time you reach your overdraft, interest fees are due. They will be deducted in regular intervals from your account. The interest is calculated on a daily basis – a new receipt of money, e.g. by transferring money to the overdrawn account, can easily balance your account again. This way, you can avoid high costs.
As interest rates are usually very high when reaching your overdraft, this is no long-term solution. If you can foresee running a deficit over a longer period of time, it makes sense to consider a loan. With a loan you can easily balance your account again. These interest rates are usually considerably lower and can save you a lot of money.
Overdraft interest is due if you exceed your overdraft. The height of the overdraft interest is even higher than the interest due when you reach your overdraft. Therefore, you should definitely try to avoid overstraining your overdraft facility. The height of the overdraft interest rates are justified by the high credit risks the banks take. If the customer cannot repay the money, the bank will be left with their debt.
There is a second scenario in which overdraft interest can be due: if you have a current account without an overdraft facility that theoretically enables you to overdraw your account, overdraft interest are due as soon as you run a deficit. This cannot happen to every account without an overdraft. Many current accounts do not allow any payments or withdrawals if there is not enough money left on the account. This way, you do not run the risk of an overdraft and of having to pay interest for it.