An overdraft is pre-arranged facility that allows bank account holders to have a negative balance on their bank accounts – effectively borrowing money from the bank.
Account holders will typically be charged interest on their negative balance.
If they exceed their overdraft limit (the limit to which an account holder can have a negative balance), they will typically be charged a fee of around £30 along with interest on the amount they are exceeding their overdraft limit by. However, these charges are set to fall below £12 under new Office of Fair Trading rules.
Interest charges above overdraft limits are often considerably higher than charges on money below the overdraft limit.
However, by shopping around consumers can find current accounted offering overdrafts that charge less than ten per cent interest – even when an overdraft limit is exceeded.