What is an overdraft?

The definition of overdraft refers to the situation that occurs when an individual or company does not have enough funds in their account to cover a transaction and the bank pays it anyway. You may incur an overdraft with checkbook, debit card purchases, automatic bill payments, ATM operations or electronic withdrawals.

What is an overdraft?

The concept of overdraft takes into account the payments made by the financial institution that exceed the balance of the holder's account. When a company opens a current account with a specific value you have the possibility to rotate checkbook for a value equal to or less than the one you have in your balance, but in certain cases the bank allows you to write checks for a value higher than the account balance and that is when the bank overdraft occurs.

For example, you open an account with 1.000 euros. We understand that it is not possible to write checks higher than this figure, but if the bank authorizes it, for example checks worth 1.200 euros could be drawn, where the overdraft would be 200 euros.

Therefore, what was initially an asset ends up becoming a passive. The overdraft refers to the credit quota that the financial institution approves to the holder, and if used, it becomes a liability.

How does an overdraft work?

With the overdraft, what is actually achieved is that the bank facilitates a credit, even if it is only a few days to cover the overdraft that there is. This situation implies a fairly high expense in relation to the amount and duration of the debt.

The bank will receive commissions for a series of concepts, such as going from positive to negative balance and regardless of the time the overdraft lasts, an annual interest as in any credit and a minimum commission regardless of the amount of the debt .

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