An overdraft is borrowing attached to your current account. If your balance falls below zero, you are using money from the bank rather than money already in your account.
The basics
Some current accounts come with an arranged overdraft facility, while others do not. If you have one, your bank normally tells you the maximum amount you can borrow and the interest rate that applies.
An overdraft is usually designed for short-term borrowing rather than as a permanent extension of your income. Because the balance can move in and out of overdraft as money enters and leaves the account, the amount of interest can vary from day to day.
Arranged and unarranged overdrafts
Arranged overdraft
This is an overdraft limit your bank has agreed with you in advance. For example, the bank may allow your account to go down to minus £500.
Unarranged overdraft
This happens when you go overdrawn without an agreed overdraft, or go beyond your arranged limit. A payment may still be declined, depending on the bank and the transaction.
What can an overdraft cost?
Many UK overdrafts are priced using an annual interest rate rather than fixed daily or monthly usage fees. Your bank should show the rate for your account and explain how interest is calculated.
Rough overdraft interest checker
This uses simple interest as an illustration. It is not a quote and may not match your bank’s calculation exactly.
How do you pay an overdraft off?
Money paid into the current account normally reduces the amount you are overdrawn. If your account is £400 overdrawn and £250 is paid in, the balance would usually become £150 overdrawn before any other transactions.
What if you cannot get out of it?
If overdraft interest is becoming difficult to manage, contact the bank before the situation gets worse. You can also use a free UK debt-advice organisation for independent help.