What is an overdraft?

[skygod]

Ok, so I know that an overdraft is when your bank allows you to borrow money in a way, but how exactly does it work. Say you have a current account with a �500 overdraft option, when you get to �0 balance does that mean that the bank 'puts' �500 in there that you can spend. Can you spend it any way, ie. when you get to �0 balance can you go to a cashcard and withdraw �500 cash from it (if the withdrawal per day limit was �500+). Does it mean you can pay by debit card for things and not have it fail when you have �0 balance, or �10 balance but you want to buy something for �20? When you are into your overdraft does it show your balance as negative �275 etc etc.?

[Buenchico]

(AB is refusing to let me post this answer in one piece, so I'll try splitting it into 2 parts):

I think the answer to most of the questions you've asked is simply 'yes'.

Let's start, however, by assuming that you've not got an overdraft facility. If you've got, say, �50 left in your account and write a cheque for �200, the bank can do one of two things. Either they can simply 'bounce' the cheque (and charge you about �30 for doing so) or, they may honour the cheque and let your account go �150 'into the red'. (Depending upon the bank's procedures, this will show on your account either with a 'minus' sign in front of it or with the letters 'DR' alongside). This is known as an 'unauthorised overdraft'. There are three problems here. First of all, it was illegal to write a cheque with insufficient funds. Secondly, you didn't know when you wrote the cheque whether or not the bank would honour it and, lastly, the bank will almost certainly charge a very high rate of interest on the loan which it has effectively given you.

If, however, the bank has already agreed to an overdraft facility (as with the �500 limit you refer to) this means that you can write the cheque (or take money from a cash machine) knowing both that the arrangement will be honoured (i.e. no bounced cheques or problems at the cash machine) and that the rate of interest charged will be much more reasonable.

I hope that I've made my answer clear but just in case you're in any doubt: Yes, you can continue taking money out of the your account (either from cash machines or by using debit cards) until your balance reaches 'minus �500'.

[Buenchico]

(Last little bit):

The only thing to warn you about is that banks can legally cancel overdraft facilities without prior notice. (i.e., if they so choose, they can demand immediate repayment of whatever you owe them). This isn't normally a problem but if, say, you've already got a small overdraft when you lose your job it would not be a good idea to tell the bank that you're unemployed - otherwise you might lose the overdraft facility just when you need it most.

Chris

[mistapoole]

Being a student I am familiar with this. When you have an overdraft you can always spend what you have agreed. For instance, with a �500 overdraft, and say �20 in the bank, a cash mashine will display: Account Balance �20. Today you may withdraw �520. When you are in your overdraft it shows a negative balance but still allows you to withdraw, and spend on debit cards, up the overdraft limit.