What is an overdraft?

An overdraft is a kind of personal loan linked to your bank account. An overdraft works a lot like a credit card. It is a line of credit that is activated when your account balance falls below zero. There are two types of overdraft – unarranged and arranged.

What is an unarranged overdraft?

An unarranged or accidental overdraft is activated when bank fees, direct debits or your own purchases pushes the balance in your account below zero. This negative balance is a form of credit given to you by the bank. They will probably charge you an overdrawn account fee and interest on that debt until your account balance returns to zero or above. Overdrawn account fees can be high – around $30. Your bank or credit union may waive the fee the first time you incur an accidental overdraft, if you ask. Some banks and credit unions have reduced or eliminated overdrawn fees on some accounts and for some low income customers.

What is an arranged overdraft?

Some banks and credit unions will let you apply for an overdraft on your personal bank account. The overdraft limit, like the maximum credit limit on your credit card, is the maximum amount of money that you can owe the bank at any time. Overdraft limits start at around $500 and range up to $10,000 or more on business accounts according to ASIC’s MoneySmart consumer information service. Interest is charged only on the balance of the overdraft account, not the credit limit. You may also be charged fees.

You will have to prove you can repay the overdraft by supplying pay slips or tax information. You can get a cheaper deal by opting for a secured overdraft. A secured overdraft, like a secured personal loan, uses a house or a car as security, lowering the risk for the lender and lowering the interest rate for you.

Infochoice lists approx 25 banks and credit unions that offer overdrafts as a form of credit.

What is my overdraft interest rate?

You can search for your overdraft interest rate on the Infochoice overdraft comparison table here and compare it with other products in the market or you can ask your bank or credit union what they charge in interest and fees on an overdraft.

You can research and compare overdraft accounts here.

 

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