Bank overdrafts are a form of short term borrowing offered on current accounts. An overdraft is occurs when you have no money left in your current account and you have an outgoing transaction that you do not have enough funds to cover. In many cases the bank will still honour this transaction but the payment will result in you going in to debt with your bank. This may sound like a minor issue but in reality interest rates can be pretty high and there is often a daily fee while you are in your overdraft, these costs can be even higher if your overdraft is not pre-authorised in advance by the bank. A common term for being overdrawn is ` being in the red`, whilst when you have a positive balance it is normally termed `being in the black`.
If you use an overdraft regularly, don`t worry you are not alone, thousands of people go overdrawn every month. A big advantage for approved / authorised overdrafts is the flexibility of the credit line which can be really useful in short term borrowing situations. However if you are continually living in your overdraft then you may consider taking steps to get `back in the black`. The first step is to consider your monthly budget, try cutting down your outgoings (go out less, buy fewer clothes and try to save some money in a different account) as this can save on your monthly expenses in the future if you are able to clear your overdraft.
Another option is to consider a short term personal loan, this can be used to get you out of your overdraft and give you a structured debt payment schedule, when looking at the options check all of the interest costs and any fees associated and find which is the cheaper option between these two options, this will vary on a case by case basis. Personal loans can start at circa £3,000 to £15,000 which would more than cover most available overdraft facilities.
When account holders end up writing cheques or spending money whose amounts surpass that of the available balance in their accounts, they are often faced with the existence of bank overdrafts. Bank overdrafts are subject to the fees to be paid by the account holders in cases where they spend larger amount of money than the account balance can cover. Here are the different reasons responsible for the existence of bank overdrafts:
The expenses exceed the available balance.
Account holders who lose track of the amount of money they have left on their accounts are vulnerable to bank overdrafts. If they spend more money than the account balance can cover, either by releasing too many outgoings or by withdrawing too much cash, they end up with bank overdrafts.
The joint accounts experience problems and complications.
The lack of understanding or the lack of communication between the parties involved in a joint account may be a source of problem that may even result in bank overdrafts. Two parties who fail to coordinate with each other regarding the different financial transactions made such as cash withdrawals, cheques issued and money deposited, are prone to going overdrawn because they may compromise the money that they probably don't even have.
Some automated teller machines (ATM) permit the withdrawal of cash even if the account has insufficient cash balance left in it. Because some account holders are oblivious of the fact that they may be taking an amount of money that exceeds the available balance, they end up having bank overdrafts and incurring interest and fees as bank charges.
The fund or your current account is temporarily on hold / suspended.
Due to some individual bank policies or other technical reasons, funds from some accounts may not be readily available (known as `cleared`) for financial transactions. Because of the delay in the release of funds, some pending financial transactions lead to the presence of bank overdrafts.