What is an overdraft and when can it be useful?

The word "overdraft" can be translated as "overspending". This option can be enabled by the debit card holder with the permission of the bank. Then, if his own money in the account is not enough, he will be able to spend a little more. The balance will go into negative territory, and the money, when credited to the account, will first of all go to repay this debt.

What size is an overdraft and how to connect it

This service is available only to debit card holders. We can say that an overdraft is a short—term loan that the bank is ready to provide to the owner of such a card. First, the financial institution calculates the amount of the client's monthly income, and then determines the limit of allowed overspending.

Some banks allow you to go into the red for an amount that does not exceed 50-70% of monthly receipts. Others increase it to twice the monthly income. But the bank is unlikely to give the go-ahead for overspending if the money is credited to the debit card irregularly.

Therefore, it is worth registering this service with the financial institution that issued your salary card. If the overdraft conditions are more favorable for you at another bank, you can issue a card there and make it a salary card by informing the employer of the new details.

To activate an overdraft, you just need to contact the bank that issued you a debit card.

Why you may need an overdraft

This option is usually used as an emergency in case of unforeseen expenses. An overdraft is a small loan before payday, which you will definitely be able to repay in a few days.

For example, you need to buy shoes urgently. The selected pair costs 4,000 rubles, there are only 1,500 left on the card, and two days before the salary. If you have an overdraft card, you can pay at a shoe store and go into the red for 2,500 rubles. And then go to the supermarket and buy food for 1,000. The total cost overruns will amount to 3,500 rubles.

When you receive your salary, the bank will immediately pay off the shortfall and deduct these 3,500 from the amount received.

What are the advantages and disadvantages of an overdraft

An overdraft differs from a regular consumer loan or credit card in terms of using bank funds. And it has its advantages and disadvantages.

Disadvantages of overdraft

They relate to the loan terms and the interest charged by the bank.

• A loan is usually issued for a long time, an overdraft is not. An ordinary loan is closed by a person for several months, or even more than a year. The overdraft is extinguished immediately — at the first receipt of money. The bank can also set a certain period for this — usually it does not exceed two months from the date of the debt appearance. If there are no receipts to the card during this time, the bank may start charging a fine for each day of delay.
• The amount of a regular loan is significantly more than the allowed overdraft. As a rule, the amount of a consumer loan can be several times higher than the amount of monthly income. The credit card limit is also often higher than the client's salary. Overdraft amounts are usually much smaller, as the bank wants to be sure that the customer will quickly close the shortfall.
• The terms of use of an overdraft are usually less profitable. The interest for allowed overspending is usually higher than for a loan and even a credit card. Overdraft terms can vary greatly from one credit institution to another. For example, some banks offer a grace period for its repayment. It usually does not exceed a month, and no interest is accrued at this time. But it happens that there is no grace period at all.

Sometimes financial organizations set a free amount of overspending. For example, it is 3,500 rubles, and if the client went into the negative for exactly this amount, he will return only this money without overpayment. If he spends 3,600, the bank will withdraw this amount plus interest. But often a free limit is not provided, and interest is charged on any amount of overspending.

Conclusion: if you need a large amount and for a long time, it is unprofitable to use an overdraft, and often simply impossible, so it is better to think about a loan.

Advantages of an overdraft

It seems that this banking product has only disadvantages. But this is not the case — you can also find the advantages of an overdraft.

• Money is available immediately. You do not need to apply for a credit card and spend time on it. For example, in a store, when paying for an important purchase, you found that you do not have enough of your own funds. Or you are in another city, there are urgent unforeseen expenses, but you have no one to turn to for help. An overdraft will help solve the problem.
• You do not need to pay extra for card maintenance. If you have activated a credit card, many banks will charge money for its maintenance, even if you are not using it now. Overdraft is an option for an existing debit card, so you will not have to pay extra.
• There is no danger of late payment. The bank will ensure that the debt is repaid on time. The main thing is that the money is credited to your account . But if this is a salary card and transfers occur regularly, there will be no problems.
• The overpayment is usually quite small. If there are only a couple of days or a week before the money arrives, and the amount of debt does not exceed several thousand rubles, the overpayment is unlikely to hit your budget much. It is likely to be less than the fee for a loan from a microfinance organization.

Conclusion: if you need money urgently, but the amount is small and you can give it back in a few days, an overdraft can be an excellent way out.

If you are ready to use this option in an emergency, you should activate it in advance. If there is no need for additional expenses, then the overdraft can never be used at all. But it is worth considering such a possibility and arrange the service as a safety net.