Overdraft

When an account is overdrawn, the bank is effectively lending you money to cover the shortfall. If you have 200 in your account and pay a bill of 350, your balance becomes −150. You now owe the bank 150.

Some accounts come with an arranged overdraft, a pre-agreed limit up to which you can go below zero. Others allow unarranged overdrafts, which happen without prior agreement and are often much more expensive.

Overdrafts are usually costly. Banks may charge interest on the overdrawn amount, daily or monthly fees, or a fee for each transaction that takes the account below zero. In some cases, payments may simply be rejected, with a fee charged for the failed payment.

An overdraft can be a useful short-term safety net for a few days until payday, but it is a poor way to borrow over longer periods. For ongoing shortfalls, a personal loan or a cheaper credit option is usually better, and building a small cash buffer in the account helps avoid overdrafts altogether.