Think of a bank overdraft as a temporary safety net offered by your bank. It lets you spend or withdraw more money than you actually have in your account, up to a certain pre-approved limit.
How it works
- If you have ₹1,000 in your account but need to pay ₹1,200, an overdraft allows the transaction to go through.
- Your account balance will then show as -₹200.
- The bank charges interest only on this ₹200 (the amount you "borrowed"), not on the entire limit they might have offered you.
- You're expected to repay this negative balance, plus any interest and fees, to bring your account back to positive.
Key things to know
- Short-term help: Overdrafts are best for covering unexpected bills or bridging short-term gaps until you get more money (like your next salary).
- Flexible repayment: You usually don't have fixed monthly payments (EMIs) like a regular loan. You can repay the amount when you have funds.
- Interest and fees: Banks charge interest on the amount you overdraw and may also charge fees for using the facility.
- Approved limit: The bank sets a maximum amount you can overdraw, based on things like your income and how you've handled your account before.
- Could affect credit: If you don't repay on time or go beyond your limit, it can negatively impact your credit score.