What is overdraft?
An overdraft is a type of loan that is used when an individual or business does not have enough funds in their bank account to cover a transaction. When an overdraft is used, the bank will cover the transaction by lending the customer the necessary funds, up to a pre-agreed limit. The customer will then be required to repay the borrowed funds, along with any associated fees or interest.
Why banks issue overdraft?
Banks issue overdrafts as a way of offering financial support to consumers. Overdrafts are useful when unexpected expenses arise and can save consumers from an expensive financial burden by allowing them to borrow money beyond their current available balance. Banks also benefit from issuing overdrafts since it allows them to generate increased revenue through the fees associated with the service.
How interest on overdraft is calculated?
Interest on overdraft can be a costly financial burden and knowing how it is calculated can provide valuable insight when managing your finances. Essentially, banks and credit unions will primarily use the annual percentage rate (APR) to determine the amount of interest paid on an overdraft. Factors such as credit score and overdraft limit will usually play a role in APR calculation.