Overdraft: what is it and how to use it correctly

[Carding]

What Is an Overdraft?
An overdraft is an extension of credit from a lending institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

Basically, an overdraft means that the bank allows customers to borrow a set amount of money. There is interest on the loan, and there is typically a fee per overdraft. At many banks, an overdraft fee can run upwards of $35.

How an Overdraft Works
With an overdraft account, a bank is covering payments a customer has made that would otherwise be rejected, or in the case of actual checks, would bounce and be returned without payment.

KEY TAKEAWAYS

• Overdraft protection is a loan provided by some banks to customers when their account reaches zero.
• The overdraft allows the customer to continue paying bills even when there is insufficient money in the customer's account(s).
• An overdraft is like any other loan, the customer pays interest on the loan and, in the case of overdrafts, will typically have a one-time insufficient funds fee.

As with any loan, the borrower pays interest on the outstanding balance of an overdraft loan. Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency. In many cases, there are additional fees for using overdraft protection that reduce the amount available to cover your checks, such as insufficient funds fees per check or withdrawal.

An Example of Overdraft Protection
Overdraft protection provides the customer with a valuable tool to manage their checking account. If you're short a few dollars on your rent payment, overdraft protection ensures that you won't have a check returned against insufficient funds, which would reflect poorly on your ability to pay. However, banks provide the service because of how they benefit from it - namely, by charging a fee. As such, customers should be sure to use the overdraft protection sparingly and only in an emergency.

The dollar amount of overdraft protection varies by account and by the bank. There are pros and cons to using overdraft protection. Often, the customer needs to request the addition of overdraft protection. If the overdraft protection is used excessively, the financial institution can remove the protection from the account.

Special Considerations
Your bank can opt to use its own funds to cover your overdraft. Another option is to link the overdraft to a credit card. If the bank uses its own funds to cover your overdraft, it typically won't affect your credit score. When a credit card is used for the overdraft protection, it's possible that you can increase your debt to the point where it could affect your credit score. However, this won't show up as a problem with overdrafts on your checking accounts.

If you don't pay your overdrafts back in a predetermined amount of time, your bank can turn over your account to a collection agency. This collection action can affect your credit score and get reported to the three main credit agencies: Equifax, Experian, and TransUnion. It depends on how the account is reported to the agencies as to whether it shows up as a problem with an overdraft on a checking account.

(c) https://www.investopedia.com/terms/o/overdraft.asp

 

[Father]

We will tell you what an overdraft is and how it helps to solve urgent problems.

What does overdraft mean?
Literally translated, this means "overrun". That is, you can spend more on your card than you have on your account.
For example, John will be able to buy a refrigerator, even if there is not enough money on the salary card. But only if the bank has approved an overdraft on her card in advance. And then, as soon as the salary falls into the account, the bank will automatically write off this overspending in its favor.
Overdraft is the same loan. The bank issues it on certain conditions: it stipulates in advance the maximum loan amount, interest on it, an interest-free period (if any), fines and penalties in case of delay.
Most often, overdraft is used when some unforeseen expenses have happened and you need to intercept a little before the paycheck. But if the overdraft limit allows, it can also be used to make large purchases, as John did.
But overdraft also differs from consumer loans and credit cards.

What are the features of overdraft?
The main difference is that it is valid for debit cards. And only for salaries or those who regularly receive payments. This is a guarantee for the bank that the overdraft will be repaid on time.
Sometimes there is an overdraft on credit cards - it allows you to go beyond the credit limit by a certain amount, but this is rather an exception.
Here are some other differences.

Term
The loan can be issued for several years, and credit card payments can be extended over several months.
Overdraft debt is allowed only within a month. It is extremely rare - two. During this time, you need to fully repay the overdraft - and then you can use it again.

Amount
The size of the loan or credit card credit limit can be several times your average monthly income.
The overdraft limit is almost never more than double the regular income.

Payment amount
Both the loan and the credit card debt are usually repaid in equal parts, gradually, according to the payment schedule. Thus, the repayment of the entire debt can be extended over several months or years.
The overdraft is canceled automatically and completely. As soon as money is credited to the account, the bank first of all writes off the entire amount of the overdraft.

Percent
Overdraft interest is usually higher than credit cards and even more loans. But since the overdraft is canceled very quickly, the overpayment turns out to be small. Sometimes banks offer overdrafts with a grace period - if the debt is repaid within a certain period, usually up to 30 days, no interest is charged.

What are the advantages of overdraft?
Overdraft has more restrictions than other types of loans, but there are also advantages.

• There is no need to apply for an additional credit card and pay for its service. You can use your own salary card.
• The overdraft is connected once, and you can use it many times during the year or until the expiration date of the card. The term depends on the conditions of the bank. In the case of a consumer loan, you will have to apply for it every time you need money.
• There is no need to worry about paying off the debt to the bank on time. The overdraft is debited automatically as soon as the salary or other payment is credited to the account.
• Overpayments on overdraft are always scanty, because the term of such a loan is minimal.

John bought a refrigerator for $ 1000. Of these, he paid $ 500 through an overdraft facility. The bank charges an overdraft rate of 30% per annum. This is a lot. But since John's salary was credited to the account a week later, he overpaid only $ 10.

How to apply for an overdraft?
Mandatory requirements for connecting an overdraft are registration in the region where the card is serviced, permanent work and a good credit history.
The easiest option is to contact the bank that issued your salary card and ask to connect an overdraft.
The bank will analyze how much money is credited to the card and with what regularity, and will determine the amount of overdraft available to you. Repayment terms and interest on debt are usually standard for all clients.
If your bank does not offer overdraft to private clients, you can transfer your salary to another bank and provide the new details of your accounting department.
Sometimes, on the contrary, banks connect overdraft to salary cards automatically. But this must be specified in the card service agreement. If you are a principal opponent of life on debt, you can ask the bank to disable the overdraft or set a zero limit on it.

And I had an overdraft, although I did not connect it
This is called a technical overdraft. It can happen to any card. You can go into the negative on a debit card or beyond the limit on a credit. This sometimes happens due to the peculiarities of the payment systems, mistakes of the bank itself or your forgetfulness.
For example, when you pay with a card abroad, the payment usually takes a couple of days. If during this time the exchange rate has increased, and the card is in rubles, more will be charged from your account than you expected, and a minus may appear on the card.
Mandatory payments, such as a card service fee, can also cause an unauthorized overdraft if there was no money on the account at that moment.
Sometimes the bank will deduct a payment twice by mistake. This can also cause an overdraft.
Most often, banks give time to pay off the congestion: usually a month. And only after that, the bank begins to charge interest and fines on this debt. It is better to check the duration of the grace period with the bank in advance. If there is no interest-free period, you need to carefully monitor the state of the account, or even better - keep some small balance on the card in case of such unforeseen situations.

Can I apply for an overdraft for my business account?
Yes, most banks offer this service to their business clients. If your current account regularly receives payments and their amount is stable from month to month, the bank will most likely agree to connect you with an overdraft. Its size, as well as for personal cards, will depend on the monthly turnover.

For entrepreneurs, overdraft may become an even more convenient type of loan than others. It is ideal for replenishing working capital and covering the cash gap.

• It is enough to get the approval of the bank just once - and you can use the credit money any time you need it.
• The bank usually considers an application for an overdraft faster than for a loan. After all, the bank already has all the necessary information about the movement of money in your account.
• The overdraft interest for a business account may be lower than for a loan.
• Unlike personal accounts, an overdraft on an account of a company or an individual entrepreneur may be allowed not for a month or two, but for one or two years. These conditions should be clarified in advance.
• For overdraft, the bank almost never requires collateral if the amount is small in relation to your turnover and the loan term does not exceed a year. And there is no need to report on what you spent the overdraft on.
• The overdraft loan is repaid automatically as soon as money is credited to your account. No additional action is required.

However, overdraft for business also has disadvantages and limitations.

• For the provision of each tranche (new overdraft loan), the bank may charge a commission. Its size needs to be clarified before applying for an overdraft.
• The bank usually sets the requirements for the turnover on your account for the entire period of the overdraft. That is, until you repay the loan, your account should receive monthly amounts no less than those determined by the bank. Otherwise, the bank may demand to return the entire amount of the overdraft debt ahead of schedule.

Overdraft can be a very convenient and profitable tool, a financial lifesaver for both personal budget and business. But before you start using it, you need to clarify all the conditions with your bank and assess the benefits and risks. And like any loan, overdraft requires financial discipline.

 

[Mutt]

Overdraft. What is it in simple words

Contents

• 1 Overdraft - what is it?
• 2 Types of overdrafts
• 3 Conditions for granting credit to holders of plastic cards
• 4 The difference between overdrafts and consumer lending
• 5 Overdraft for legal entities

People now know a lot about loans. But the overseas word "overdraft" (aka overrun) is not familiar to everyone. What is this loan product and to whom is it available? Let's try to talk about this in simple words.

Overdraft - what is it?
Overdraft is one of the types of short-term lending, which allows you to spend more funds than there is on the account. For example, in a store you don't have enough money to pay for a desired purchase. Then the bank will automatically add the missing money to you, allowing you to create a negative balance on the account. In fact, this is a revolving credit line for citizens - money can be borrowed an unlimited number of times and in any amount, you cannot just exceed the established limit.
However, not everyone and not always can take advantage of such overlimit. It is important that this service is connected to your bank card. Moreover, it does not matter at all what kind of card it is - debit or credit, overdrafts can be installed on any. The main thing is that admissions to it are periodic.
The main difference between an overdraft and a regular consumer loan is that as soon as you have a debt (overspending on the card), then any amount credited to your account will go to pay off this debt. In a regular consumer loan, you pay a monthly fixed installment according to the repayment schedule.
Overdraft lending is available not only to citizens, but also to legal entities. Here, the limits are set in relation to the expense of funds passing through the client's current account. To register the service to the Bank Account Agreement, you need to conclude an additional agreement.
Overdraft is an inappropriate type of loan, which is very rare in lending to legal entities. With standard lending, it is they who are limited in the areas of costs and can spend funds only where it was agreed upon when the loan was issued. In addition, many credit products require a report on the intended use of credit funds. Here, all this is irrelevant.

Types of overdrafts
There are 2 types of overdraft:
1. Permitted. This is the same loan for which you applied in good faith and the bank approved the requested limit. In this case, you are using other people's money on a completely legal basis.
2. Unauthorized, which is often also called technical. Such overspending occurs without the approval of the bank due to the peculiarities of the functioning of payment systems:

• change in the exchange rate - having paid in euros from a ruble card, in a couple of days you can go into an unauthorized "minus" due to the growth of exchange rates;
• unconfirmed transactions - when making a purchase, focus on the free balance of the overdraft on the card, and later the funds are debited for a previously approved transaction;
• technical mistakes of the bank - for example, double debiting from the card (if the balance on the card account is less than the repeated debiting amount, then an overdraft occurs) or erroneous crediting of money to the account. In the latter case, the return of an erroneous amount will also lead to the formation of an overrun if the balance on the card was less than the return.

Technical overdraft occurs infrequently, but they must be borne in mind. The cardholder must know how much of his own money is on his account before using the card to buy or withdraw cash. In some cases, the statement may include the available credit limit as the balance, i.e. overdraft, leaving for which can lead to unpleasant consequences: overdue debt to the bank.
For legal entities, the gradation will be somewhat different. Here overlimits cannot arise for technical reasons, all of them were necessarily approved by the bank and documented.

There are also 2 types of overdrafts:
1. Unsecured - this type of lending does not require collateral. Such "overs" are issued most often, but for a period not exceeding a year;
2. Secured. Here the loan term is slightly higher - up to two years, but the conditions are already different. In this case, the possibility of overspending on the account is supported by a pledge of property or guarantees from third parties.
Banks take as collateral real estate, securities, goods in circulation, rights to receivables, bank guarantees, etc.

Conditions for granting credit to holders of plastic cards
The main condition for providing an overdraft is regular receipts to the plastic card account. This can be a pension, salary, etc. There are not many requirements for the client (they may differ slightly in different banks):

• registration in the region of service of the card;
• "Spotless" credit history;
• permanent employment.

To obtain the appropriate approval from the bank, you need to apply for an overdraft and provide the necessary package of documents, which is established by each credit institution independently. Basically, they require a passport and any other document (SNILS, driver's license), a salary certificate in the form of 2-NDFL or on a bank letterhead. Some banks issue overdrafts without confirming the level of income.
They easily replaced the salary certificate with a card account statement for the required period of time.
The loan term may vary, but mostly these are loans up to a year. For a whole year you have the opportunity to use the money provided, but after this period, the overdraft will have to be reissued.

The overspending limit is also an individual matter. It depends, first of all, on the amount of receipts to the account. In addition, each bank has its own maximum amount of funds provided under the overdraft, expressed as a percentage of the amount of receipts. For example, bank sets a limit that does not exceed 50% of the average monthly income, while for Rosselkhozbank this maximum reaches 150%.

Perhaps the only drawback of an overdraft is its interest rate. It, as a rule, greatly exceeds the level of interest on conventional consumer lending and originates from 30% per annum. But many banks here, too, met borrowers halfway and established a grace period for debt repayment. So, if you returned the excess funds spent within a strictly specified period (usually from 30 to 60 days), then you will not be charged any interest at all.
On the other hand, given the short loan term and small amounts of debt, the overpayment, even with a high interest rate, is not that high. If you express it in rubles, not percent. That is why many are accustomed to "intercept" loans, while paying not so significant amounts.

Repayment of overdraft payments, on the contrary, is a huge plus - you do not need to go to the bank or transfer funds with the help of intermediary organizations, paying interest to them as well. Upon receipt of the next amount of wages (pensions, etc.), repayment is made automatically. Moreover, first of all, the "body" of the debt is extinguished (that is, the overspending itself) and only then - the accrued interest, and after all this - penalties and fines, if you have made a delay. Delays with this type of lending are extremely rare, because the next amount of income will necessarily cover the debt, at least partially.

The difference between overdrafts and consumer lending[/HEADING]
Overdraft is a loan that is easy to arrange, use and repay. This is where its similarity with the usual "need" ends, and solid differences begin, presented in the table below.

	Credit	Overdraft
Term	Both short and long. Depending on the requested amount, conditions for a specific product and financial capabilities of the borrower	Exceptionally short-term lending. The limit is set for up to 2 years, and full repayment is made at least once a month.
Amount	May exceed the average monthly earnings many times	Not more than twice the monthly income (depends on the bank)
Payment amount	The amount due to be paid is divided into equal parts. They need to be deposited monthly, regardless of the amount of the account balance	With the next receipt of money, the entire debt is extinguished at once. And only if the salary was not enough, the rest of the debt will be written off the next time you receive it.
Overpayment	Overpayment is pre-agreed by the contract (at a fixed rate) with the possibility of reduction in case of early repayment	Accrual of interest on a daily basis on the actual debt on the loan
Interest rate	Depends on the creditworthiness of the loan and is determined at the approval stage	Fixed value
Issue date	The loan amount is issued one-time and in full immediately after signing the necessary documentation. During the entire term of the loan agreement, there will be no other receipts.	Under an overdraft facility, money is provided instantly, as soon as there is a need for it. At least at 1 am, at least at 5 am. Such loans will continue for the entire duration of the contract.

Overdraft for legal entities
Overdraft for legal entities is provided for the purpose of replenishment of working capital. That is, if the enterprise temporarily does not have money to pay for raw materials, goods, tax payments, etc. It is a preferential form of lending and is issued only to borrowers in good financial standing.

Why is an overdraft called a concessional loan? This is due to simplicity in everything:

• in extinguishing;
• in use;
• in short terms of consideration of the application;
• in the ability to take a loan without collateral.

In order for a legal entity to issue an overdraft, you need to open an account with a specific bank and conclude an agreement for settlement and cash services. Overdraft lending is formalized by an additional agreement to the bank account agreement.

The following requirements are imposed on a potential borrower:
1. Constant turnovers on the current account. If it is just open, you will be asked for a formal letter indicating the estimated receipts and expenditures.
2. Stability of monthly turnovers. The variant "January - $ 10, February - $ 15000" will not take place in every bank.
3. Lack of card index No. 2 to the current account. It reflects the claims of third parties (requirements of the tax service, etc.).
4. Good credit history.
5. Good financial position.

The credit limit is set as a percentage of the average monthly credit turnover on the account. This percentage is set individually in each bank. Turnovers are calculated for the last six months, rarely - for 3 months.
The interest rate on overdraft of legal entities is lower than on target loans. But in addition to it, the bank will take a commission for the provision of each tranche and maintenance of the loan account.

Loan term - up to 2 years, and the last tranche can be issued no later than 45 days before the closing of the loan obligations. These terms are also set individually and depend on the conditions of a particular bank. For loans with a relatively small amount and a term of up to a year, collateral is not required.
A distinctive feature of loans in the form of "overdraft" is the requirement to maintain a certain level of credit turnover on the account. This means that the borrower must, on a monthly basis, ensure the receipt of funds to the current account not less than the amount established by the bank for the entire loan period.
This amount is not taken "out of nowhere", but is calculated using a formula that takes into account the actual amount of receipts. For failure to comply with this requirement, the bank has the right to suspend the issuance of the next tranche.

Debt repayment is the same as for bank cards of individuals. All receipts are first directed to repayment of overdraft obligations, and all surplus “settles” on the account as a free balance. If there is enough money on the client's current account to pay current payments, the tranche is not provided under the overdraft.
Any loan should be taken wisely, and overdraft is no exception. For legal entities, such lending is more of a lifesaver, but ordinary citizens can be driven into a real debt trap. The uncontrolled withdrawal of money from the card and the extremely easy repayment procedure are very relaxing and dull vigilance. Therefore, before using an overdraft, analyze all the pitfalls and do not fall into a credit trap.