Occasionally, unexpected financial requirements arise out of nowhere. Imagine you are having a typical day and you need money. Unfortunately, the available funds are insufficient to cover your expenses. What do you do? Borrow from companions?

What happens when that fails? You can always contact your bank.

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You're presumably contemplating the amount you need and whether or not you need a loan from your bank. You are sufficiently discouraged by the bank loan application process, even though you may not believe it to be particularly complex. However, we are not discussing conventional loans. We are discussing an OVERDRAFT.

This article discusses the characteristics of an overdraft.

What is an Overdraft? 

The most prevalent form of bank lending is the overdraft. A bank overdrafts a customer's account when it permits withdrawals in excess of the customer's deposits.

The maximum amount a bank will allow for an overdraft is commonly referred to as the limit, and several factors determine this limit.

Some of the factors include: 

1.The purpose and duration of the required accommodation

2.The standing and means of the customer, and

3.The nature and the value of the security. 

A straightforward definition of an overdraft would be a credit extension from a bank or other financial institution. The extension permits a person (account holder) to withdraw from the account even if it has a zero balance or if the amount proposed for withdrawals exceeds the actual balance in the account.

Overdraft Explained

Mr. A has an XYZ Bank account with a balance of 50,000 Nigerian naira. Consider that he must withdraw 70,000 naira for a transaction. Obviously, his balance is insufficient to cover this withdrawal, but XYZ Bank may decide to allow him to withdraw anyway. This is the purpose of an overdraft.

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Typically, the bank determines the amount of an overdraft based on a variety of factors.

How an Overdraft Works?

When you have an overdraft account or an account with overdraft privileges, your bank allows you to make withdrawals or payments that exceed the available balance by a certain amount.

Normally, the bank would reject such a request, but because there is an existing agreement, it is permitted. You could say that the overdraft is a loan in advance.

Is there an interest rate on Overdraft?

Yes. The owner of the account pays interest on the overdraft. However, credit card overdraft fees are charged. It only earns interest on the amount actually used.

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How can you get an Overdraft?

You must contact your bank to determine whether you qualify for an overdraft account. It typically requires little to no formal paperwork and is a quick procedure. The Nigerian banks UBA, Access Bank, First Bank, Union Bank, and Stanbic IBTC offer overdraft services.

Conclusion

A bank overdraft is one of the most convenient methods to access bank funds. In recent years, it has assumed various forms by leveraging the openness of the BVN registration procedure.