Bank overdraft

Updated: Aug 20, 2021

Common sense dictates that the amount that can be withdrawn from a bank account is limited to the amount put in. However, particularly in the business world, the wheels of trade need to be oilci by a certain flexibility in banking policy. Constant movements of cash often call for short-term facilities to take more money out of a bank account than it contains, which are referred to as ‘overdraft facilities’. This enables customers to overdraw within agreed limits and at any time. The bank will charge interest on excess drawings but it will be charged on a day-to-day basis and will not as with a bank loan, be a fixed sum for a stated period. The fundamental difference between a loan and an overdraft is that in the former case the bank actually puts the i whereas in the latter it merely suffers the account to go into the red. Overdrafts are subject to the threat of governmental interference of the kind that affects loans but as they are not normally for a predetermined time, the effect on them is greater and more immediate. Whether or not security will be demanded for the granting of overdraft facilities wil depend on the particular bank manager and customer.

Reference: Oxford Press Dictonary of Economics, 3rd edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.