Credit practice is as old as humanity itself. Though they seem to evolve as time goes by, they still fulfil the same purpose of alleviating financial emergencies. An Overdraft is just another interesting form of credit, and through the course of this article, we will take a thorough analysis of overdraft meaning and how to qualify.
What is an Overdraft?
An overdraft extends credit from a financial institution to a customer when his/her account reaches zero. It occurs when there are no more funds in the account in question, but the bank processes an outstanding transaction through the account. This overdraft meaning leads the account holder to incurring a debt.
It is a loan because, with it, the financial institution automatically lends the amount necessary to process the transaction to the account holder. This amount needs to be returned, along with interest and other possible fees. Though they might seem helpful, a lot of thought should be given to applying for one.
Types of overdraft
They are two major types of bank overdraft and they are authorized and unauthorised overdrafts;
- Authorised overdraft
An overdraft is authorised when there is an arrangement in advance between the account holder and their bank. Here, both parties agree to a borrowing limit that can be used on all normal payment methods. These arrangements mostly come with a service fee that varies depending on the financial institution.
Authorised overdraft fees vary from bank to bank. Charges are made either daily, weekly, monthly plus interest. Considering the very high fees, an arrangement is very expensive, especially if the overdraft amount is tiny. It is highly advisable for account holders to be careful when applying for it.
- Unauthorized bank overdraft
As the name implies, an unauthorised overdraft is a form of credit that has no binding agreement in advance. Here, the account holder spends more than his account’s remaining balance. Sometimes, unauthorised overdrafts can happen with a prior agreement, if the account holder has gone beyond the agreed amount.
It is important to note that Unauthorised bank account overdrafts incur higher fees. This makes them more expensive.
How to qualify for an overdraft
Qualification and eligibility for an overdraft solely depends on the financial institution and the type of account you’re operating with. Below are the major accounts in relation to their qualification requirements.
- Overdraft against Salary account
Businesses create salary accounts for their employees. These accounts are eligible for overdrafts. There are two major requirements for taking an overdraft with a salary account. First major requirement is having a regular monthly ‘salary’ credit and the company must also be on the approval list of the bank.
Features
- Some financial institutions offer overdraft up to 3 times the current salary of the customer.
- Overdrafts require minimal documentation and easy-repay features.
- Requires customers to pay interest only on the utilised amount with the freedom to repay the amount anytime without pre-closure charges.
- This type of overdraft does not require any security or collateral.
- Overdraft on Savings Account
Despite being a relatively new credit concept in the country, overdraft on saving accounts is becoming quite popular. This is because of the backing it has received from the government.
The bottom line for qualifying an overdraft is the fact that you have to operate a form of account with the financial institution before you can be granted.
Conclusion
Getting an overdraft can go a long way in mitigating personal financial emergencies. Be it for health, home or maintenance, technology has eased literally every process for our convenience. The only distinction between an overdraft meaning and personal loan is the fact that an overdraft drawer has to own an account with the financial institution to qualify.