When a Bank account holder withdraws money up to an amount which is more than the available balance in his account then it is known as Bank overdraft. In this situation the balance of account becomes negative, that is, goes below zero and the account is said as “overdrawn”.
How it is applied for?
Generally, a prior agreement is done for overdrafts with the banks and the limit up to which overdraft can be taken and interest charged for the facility is also decided in that agreement. If the limit is exceeded then additional fees are also applicable on that along with interest decided.
Earlier this facility was limited to mortgages, time deposits, and current accounts but now main private banks also provide this facility on salary accounts and savings account. In general, anyone can take this facility using the above-mentioned accounts by simply having the agreement with the bank and paying its charges but it is only given and the limit is set on the basis of one’s account value, repayment behavior, and credit scores.
The first ever overdraft was given by Royal Bank of Scotland in 1728 when a merchant was having a problem in completing the transactions, it was decided that the bank will provide him overdraft to pay his debts which he will return to the bank on receiving the payments.
Why overdraft is so much popular?
Overdraft is just like short term loan but the procedure for this set up at once only this makes complication. Therefore it helps a lot in solving day to day financial problems of businesses easily. It is used at various instances, for example meeting the liquidity needs of a business when there is shortage of cash in it, when a business overspends unknowingly, it also helps in maintaining Goodwill of the business in few cases, like if the business has issue cheques unaware of the balance that will be left the accounts at the time when creditor will present the cheque for cash.