What is an overdraft and when can it come in handy?

The word "overdraft" can be translated as "overspending." This option can be activated by the owner of a debit card with the permission of the bank. Then, if his own money is not enough in the account, he will be able to spend a little more. The balance will go into minus, and the money, when credited to the account, will primarily be used to pay off this debt.

What size is an overdraft and how to activate it

This service is only available to debit card holders. We can say that an overdraft is a short-term loan that the bank is ready to provide to the owner of such a card. First, the financial institution calculates the amount of the client’s monthly income, and then determines the limit of allowed overspending.

Some banks allow you to go into the red for an amount that does not exceed 50–70% of monthly income. Others increase it to double monthly income. But the bank is unlikely to give permission for overspending if money is not received on the debit card regularly.

Therefore, it is worth applying for this service at the financial institution that issued your salary card. If the overdraft conditions in another bank are more favorable for you, you can apply for a card there and make it a salary card, providing the employer with new details.

To activate an overdraft, you just need to contact the bank that issued you debit card.

Why might you need an overdraft?

Typically, this option is used as emergency assistance for unexpected expenses. Overdraft is a small loan before payday, which you will definitely be able to repay in a few days.

For example, you urgently need to buy shoes. The selected pair costs 4,000 rubles, there are only 1,500 left on the card, and there are two days until salary. If you have a card with an overdraft, you can pay at a shoe store and lose 2,500 rubles. And then go to the supermarket and buy food for 1,000. The total overexpenditure will be 3,500 rubles.

When you get paid, the bank will immediately pay off the shortfall and subtract these 3,500 from the received amount.

What are the advantages and disadvantages of an overdraft?

An overdraft differs from a regular consumer loan or credit card in terms of the use of bank funds. And it has its advantages and disadvantages.

Disadvantages of overdraft

They relate to the terms of the loan and the interest charged by the bank.

• A loan, as a rule, is issued for a long time, an overdraft is not. A person closes a regular loan for several months, or even more than a year. The overdraft is cleared immediately - upon the first receipt of money. The bank can also set a certain period for this - usually it does not exceed two months from the date the debt appeared. If during this time there are no receipts on the card, the bank may begin to charge a fine for each day of delay.
• The amount of a conventional loan is significantly greater than the permitted overdraft. Typically, the consumer size loan can be several times the amount of monthly income. The credit card limit is also often higher than the client's salary. Overdraft amounts are usually much smaller, since the bank wants to be sure that the client will quickly close the shortfall that appears.
• The conditions for using an overdraft are usually less favorable. Interest rates for allowed overdrafts are typically higher than for loans and even credit cards. Overdraft conditions can vary greatly among different credit institutions. For example, some banks offer a grace period for its repayment. It usually does not exceed a month, and no interest accrues during this time. But it happens that there is no grace period at all.

Sometimes financial institutions set a free overdraft amount. For example, it is 3,500 rubles, and if the client went into the minus by exactly this amount, then he will return only this money without overpayments. If he spends 3,600, the bank will withdraw this amount plus interest. But often a free limit is not provided, and interest is charged on any overdrawn amount.

Conclusion: if you need a large amount and for a long period of time, using an overdraft is unprofitable, and often simply impossible, so it is better to think about a loan.

Pros of overdraft

It seems that this banking product has only disadvantages. But this is not true - you can also find advantages of an overdraft.

• Money is available immediately. There is no need to apply for a credit card and waste time on it. For example, in a store, when paying for an important purchase, you discovered that you lacks own funds. Or you are in another city, urgent unforeseen expenses have arisen, but you have no one to turn to for help. An overdraft will help solve the problem.
• There is no need to pay extra for card maintenance. If you have activated a credit card, many banks will charge you for servicing it, even if you are not currently using it. Overdraft is an option for an already valid debit card, so you won’t have to pay extra.
• There is no danger of late payment. The bank will ensure that the debt is repaid on time. The main thing is that at your expense money arrived. But if this is a salary card and deposits occur regularly, there will be no problems.
• The overpayment is usually quite small. If there are only a couple of days or a week before the money arrives, and the amount of debt does not exceed several thousand rubles, the overpayment is unlikely to have a big impact on your budget. It will most likely be less than the fee for a loan from a microfinance organization.

Conclusion: if you need money urgently, but the amount required is small and you can pay it back in a few days, an overdraft can be an excellent solution.

If you are ready to use this option in emergency situations, you should enable it in advance. If there is no need for additional expenses, then you may never use an overdraft at all. But it’s worth foreseeing this possibility and signing up for the service as a safety net.