An overdraft occurs when an account holder takes more money out of their bank account than they actually have available in the account. The balance of the bank account enters the negative and the account is said to be overdrawn.
Overdrafts can be either arranged or unarranged. Some account holders choose to arrange an overdraft, with a certain maximum limit, with their bank. This means that they will have agreed a certain rate of interest for any overdraft up to this amount. If they attempt to exceed their overdraft limit then they will be entering into the same territory as someone without an arranged overdraft when their bank account balance drops below zero: the unarranged overdraft. An unarranged overdraft is one which has not previously been agreed upon with the bank. Unarranged overdrafts may incur expensive bank charges and they will generally be subject to a much higher rate of interest than an arranged overdraft.
An overdraft is essentially a loan form the bank that is not subject to the same regulations and credit checks as most other bank loans. The rules that govern overdrafts vary between banks and account types. Generally banks will be more willing to offer arranged overdrafts to account holders who have a good history with the bank.
It is important for people to ensure that they understand the terms that apply to their bank accounts so that they can avoid the large charges that are often linked to overdrafts and so that they are aware of the rate at which interest will be charged on their overdraft loans.
Avoiding use of the overdraft facility is usually advisable, although knowing that the overdraft is there can provide an important form of security. Having an arranged overdraft available can ensure that it will always be possible for bills to be paid and that checks and payments will never be denied. As well as allowing the account holder to ensure that they will never miss a payment, this can also prevent them from incurring the expensive fees that are usually associated with bounced checks or unarranged overdrafts.
An overdraft can be used as a short-term loan, although the expense of the high interest rate usually prevents long-term borrowing through an overdraft. Overdrafts can also provide an emergency fund or they may be used to provide a safety net for the bank account, in case a bill needs to be paid before the account holder's next paycheck, or in case of a mistake in balancing the check book or maintaining an accurate register. Some people use their overdrafts intentionally, but others may enter into them accidentally or through some error. Either way, having a small arranged overdraft can be helpful, although it should be used with caution. Avoiding an unauthorized overdraft is important since it can result in large bank charges.
Other forms of high cost loans are also available that can be used for short-term borrowing. The risks of taking out a high cost loan are large since these types of debts can grow quickly if they are not repaid swiftly. It is, therefore, essential for borrowers to understand all of the options that are available to them before they get into debt. The suryavanshi.org website is a guide to different forms of high cost loans that will be helpful for anyone who is interested in learning more about payday loans and other forms of borrowing.