what is overdraft

An overdraft occurs when there is a withdrawal in excess of what is in a current account, resulting in the account being overdrawn. Essentially, it is a loan provided by a bank that allows a customer to pay for bills and other expenses when the account reaches zero. Overdrafts can occur through checks, ATM transactions, debit card purchases, automatic bill payments, and electronic or in-person withdrawals. If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. However, if the negative balance exceeds the agreed terms, then additional fees may be charged, and higher interest rates may apply. Overdraft protection is a credit service offered by banking institutions that pays items presented to a customers account when sufficient funds are not present to cover the amount of the withdrawal. Many banks and credit unions offer overdraft protection programs in which the bank or credit union generally pays the transaction and charges a fee (in addition to requiring repayment of the overdraft amount) . The fee for overdrafts varies by bank, but it is typically around $35 per item.