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Overdraft Account is when a bank customer withdraws more than the available funds in his/her account. Overdraft can be used in different instances
Insights into Overdraft Account
The customer of a bank account is said to be overdrawn when he withdraws more money from the account that the amount of money he has in the account.
An overdraft account is therefore an account which has been overdrawn by the account holder, usually based on the bank’s permission to do so.
For example, when Mr. John has a credit balance of $10,000 in his current account with Bank of America, New York branch, he drew a cheque of $15,000.
If the cheque is presented to the bank and the bank agrees to honor it, Mr. John will withdraw more than what he has in his account by a different of $5,000 (that is the difference between the cheque value and balance on his account).
By paying that cheque, Mr. John has been granted an overdraft of $5,000 by the Bank of America.
His account will no longer be in credit but now in debit to the tune of $5,000.
An overdraft account is a less formal form of bank lending when compared to a loan.
It can be arranged by the customer through an oral discussion with the bank manager other senior officials of the bank.
Some may be arranged through writing.
But even when arranged through writing, it does not go through all the formal process of a loan application as complicated legal documentation is avoided.
What Is An Overdraft Account?
An overdraft is normally arranged for short term borrowings.
An upper limit is set and a period is agreed on within which the overdraft will be repaid.
The customer is not expected to draw cheques above the agreed limit.
The period of repayment is the maximum period. In fact, an overdraft by its nature is legally repayable on demand.
But where a period agreed upon, the bank is not expected to call for repayment within the agreed period.
However, the customer can decide to repay all within the agreed period.
The normal thing is that though a limit is set, a good overdraft will normally be swinging from credit to debit, and from debit to credit within the agreed period and amount.
In this case, when the account is overdrawn, the customer repays and then overdraws again.
For such overdrafts, there is usually a minimum debit balance such that even when a customer repays part of the overdraft from time to time, that minimum debt balance is always outstanding.
The minimum debit balance is called the hard core borrowing.
When such hard core borrowing exists, the bank may decide to charge additional interest payments on them.
On Interest payments, overdraft are normally calculated based on the debit balance outstanding on the account on a daily basis.
Eligibility For Accessing Overdraft Facility
Overdraft are only granted to current account holders. In accounting for overdraft, no separate account is maintained.
The customer’s normal current account is also used as the overdraft account.
The practical implication of this is that any money paid into the current account is automatically applied in repaying the overdraft.
Need Help on Overdraft? Contact Your Bank
In the event that you need professional guide and assistance on Overdraft, you can do well by contacting your bank customer service representatives.