What is an overdraft?

An overdraft is a financial arrangement that allows account holders to withdraw more money from their bank account than is currently available in the account balance. This facility acts as a short-term loan or credit line, providing individuals with access to additional funds when needed, even if their account shows a negative balance.

This can be particularly useful in avoiding bounced checks or declined transactions, offering a safety net for unexpected expenses. Typically, banks may charge interest on the overdrawn amount or impose an overdraft fee, which differentiates it from simply withdrawing funds without available balance.

Understanding the nature of an overdraft is crucial for managing personal finances, as it can help prevent penalties and ensure smoother transactions at crucial times.