Overdraft

AAA

DEFINITION of 'Overdraft'

An extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money.

INVESTOPEDIA EXPLAINS 'Overdraft'

If you have an overdraft account, your bank will cover checks which would otherwise bounce. As with any loan, you pay interest on the outstanding balance of an overdraft loan. Often the interest on the loan is lower than credit cards.

VIDEO

Loading the player...
RELATED TERMS
  1. Non-Sufficient Funds - NSF

    An acronym used in the banking industry to signify that there ...
  2. Non-Interest Income

    Bank and creditor income derived primarily from fees. Examples ...
  3. Positive Pay

    A cash-management service employed to deter check fraud. Banks ...
  4. Overdraft Cap

    The maximum dollar limit that a bank will send to another financial ...
  5. Overdraft Protection

    A line of credit that banks offer to their customers to cover ...
  6. Evergreen Loan

    A loan that does not require the principal amount to be paid ...
RELATED FAQS
  1. How do you calculate payback period using Excel?

    Each financial institution offers similar products for its banking customers, including savings accounts, certificates of ... Read Full Answer >>
  2. What should you bring to a bank to open a checking account?

    Opening a checking account is a fairly simple process. You choose a bank, show up, fill out some paperwork, provide some ... Read Full Answer >>
  3. Are credit cards and debit cards considered debt instruments?

    Consumer debt instruments allow people to borrow money at specific interest rates. In recent years, the credit industry has ... Read Full Answer >>
  4. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  5. What are the similarities and differences between the savings and loan (S&L) crisis ...

    The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
  6. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Overdrafting

    An overdraft occurs when money is withdrawn from a bank account in an amount that exceeds the funds available in the account. Banks often permit this as a form of short-term loan to the account ...
  2. Personal Finance

    Should You Pawn Your Valuables?

    Pawnshops provide easy access to short-term loans, but they aren't the only option.
  3. Credit & Loans

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Insurance

    Your First Checking Account

    This owner's manual will show you what to expect from your bank.
  5. Personal Finance

    Cut Your Bank Fees

    Find out how to get the bank to pay you for using their services, not the other way around.
  6. Budgeting

    When Good People Write Bad Checks

    Overdraft protection can help when you overestimate your balance, but it will cost you.
  7. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  8. Personal Finance

    Affordable Ways For Upgrading Your Home

    Upgrading your home doesn’t have to be an expensive chore. Here we give you 8 affordable ways to increase its appeal.
  9. Retirement

    Millennials: Retire With $1,000,000 --Here's How

    It is possible for Millennials to retire with $1,000,000, if they take the right steps and make the necessary sacrifices now.
  10. Budgeting

    The Adverse Effects of Cheap Gas

    While low gas prices are welcomed, smart budgeters must anticipate future price hikes and consider the impact of low gas prices on investments and taxes.

You May Also Like

Hot Definitions
  1. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  2. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  3. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  4. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  5. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  6. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!