Overdraft is a type of credit that banks offer their customers, allowing them to spend more money than they have in their account. It works like a loan, but with the added convenience that the customer does not need to worry about making monthly payments.
Overdrafts can be a great way to bridge cash flow gaps, allowing customers to access funds when needed without having to sell assets or go into debt. They can also help customers avoid fees associated with bouncing checks or other transactions that would have otherwise been declined due to insufficient funds.
However, overdrafts can also be very expensive. Customers are charged overdraft fees for each transaction that exceeds the amount in their account, and those fees can add up quickly if the customer isn’t careful. The costs can be even higher if the customer’s bank charges interest on the borrowed amount, typically at a fixed rate.
Additionally, customers who use overdrafts too frequently are likely to be seen as a high risk and may find it more difficult to get approved for other types of credit. This could make it harder to fund major purchases in the future.
The bottom line is that overdrafts can be a useful way to bridge the gap between income and expenses, but customers considering using one should be sure to research the costs in advance and read the fine print of any agreement carefully.
