Overdrafts – Meaning and what you should know

Aug 17th, 2020

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Sometimes, financial needs arise out of literally nowhere. Imagine having a regular day, and you need to finance something. Unfortunately for you, what’s available as funds for you is not enough to cut it. What do you do? Borrow from friends? 

What happens when that doesn’t work out? You could always try your bank. 

You’re probably thinking about the amount you need, and if it’s that serious to take out a loan from your bank. The bank loan process is enough to discourage you, and you probably think it is not that deep. But then again, we’re not talking about regular loans. We’re talking about an OVERDRAFT. 

In this article, we discuss what an overdraft entails. 

What is an Overdraft? 

An overdraft is the most common form of bank lending. An overdraft occurs when a bank permits drawing on an account in excess of the funds which the customer pays in. 

We commonly know the amount to which a bank will permit overdrawing as the limit, and several factors determine this limit.

Some of the factors include: 

  1. the purpose and duration of the required accommodation
  2. the standing and means of the customer, and
  3. the nature and the value of the security. 

In simpler terms, an overdraft is a credit extension from a bank or any other financial institution. The extension allows an individual (an account holder) to withdraw from the account even when it has a zero balance, or when the amount proposed for withdrawals exceeds the actual balance in the account. 

Overdraft Explained

Take, for instance, Mr A operates an account with XYZ Bank with a balance of 50,000 naira. Suppose he needs to withdraw 70,000 naira for a transaction. Obviously, his balance cannot meet that withdrawal, but XYZ Bank can decide to let him make the withdrawal anyways. This is what an overdraft is all about. 

They usually set an overdraft at an amount, determined by the bank and many other individual factors. 

How an Overdraft Works?

When you operate an overdraft account or an account with overdraft privileges, your bank allows you to make withdrawals or payments that exceed the balance in your account up to a certain amount. 

Usually, such a request would bounce, but because there is a pre-existing agreement, the bank allows it. You could say the overdraft is an advanced loan

Is there an interest rate on Overdraft?

Yes. The account holder pays interest on the overdraft. However, overdraft interest with credit cards. It only pays interest on the actual amount used. 

How can you get an Overdraft?

You need to contact your bank to see if you are eligible for an overdraft account. It usually requires little to no serious documentation and is a fast process. Banks in NIGERIA that offer overdraft services include UBA, Access Bank, First Bank, Union Bank and Stanbic IBTC. 

Conclusion

An overdraft is one of the easiest ways to access funds from the bank. In recent time, it has taken different forms by leveraging on the transparency of the BVN registration process.

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