What is a bank overdraft?

bank overdraft

Learning how to manage a bank overdraft will give you peace of mind!

Sometimes you overspend without being aware of it. And when you enter your bank account, you notice that your total balance is in the red. Do not worry! It is a bank overdraft.

Please note that not all bank accounts have the ability to acquire bank overdrafts. This is because they are designed for special or business accounts. If you are going through this experience, don't worry. Here we explain what a bank overdraft consists of and how to manage your finances.

Bank Overdraft: What is it?

A bank overdraft is a type of loan offered by a bank or institution when the total balance of a bank account reaches zero. This loan that consists of extending the capacity of the account. In general, this modality allows you to continue spending money even after you have run out of funds or carry out a transaction with an amount greater than the money you have available.

In other words, it is a loan granted by the bank with immediate effect that allows you to continue spending money. Only some banks offer these loans and, like any other, there is an interest rate according to the negative balance and that are deducted from the account until the amount is taken over the zero balance.

The maximum limit of a bank overdraft is varied and is established by the bank. In most cases, a request must be submitted to the bank for the account to be under the protection of this loan.

It should be noted that if this "benefit" is used excessively in a very short period of time, the bank may remove the loan considering that the client's financial management capacities are poor.

How to manage a bank overdraft?

It is important to keep a bank overdraft under control, because it could easily turn into a large debt with high interest and high fees.

Never use a bank overdraft as a long-term loan

The bank overdraft is designed to cover the short-term account owner's extra expenses. If this debt is held for a long time, it can be harmful to your financial situation. This is because you have to pay higher interest and fees than usual, not to mention that you could lose the bank's approval. If you need money in the long term, opt for a traditional loan.

Get a loan

Generally, bank overdrafts are not very beneficial. The interests and commissions are higher than those of a traditional loan and you will lose out if you do not have immediate money.
You can request a free or interest- free loan to solve this problem quickly and without being affected.  

Keep an eye on your finances

You can download your bank's App or configure alerts through text messages for when the funds in your account are low. In this way, you will avoid spending more than the account and being charged with unwanted commissions.  

Use your savings or transfer from another account

If you have extra money either saved for emergencies (which in this case can be considered as one) or in a different bank account, it is best to transfer this money immediately to avoid high interest rates. The longer you let go with a bank overdraft , the higher the amounts you must pay, and this could also affect your credit history.

Use electronic transactions

Deposits and transactions made from third parties may take some time to reflect on your balance. If you miscalculate the availability of your money, you could end up spending more than necessary. Always ask your friends, family or clients to make electronic transactions instead of deposits.

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