An overdraft occurs in a bank when an account holder withdraws an amount more than what is available in the balance. In cases where overdraft facility is available and the bank account customer has an arrangement with the bank to use this facility, then there are either some fees or a fixed rate of interest that would be charged to the customer’s account later.
However, if there is not overdraft facility or the customer has no prior agreement with the bank on using it, then the bank may either just deny the transaction or may charge a fee in addition to the rate of interest and applicable taxes to the customer after the transaction has been made.
If there is a prior agreement between the bank account holder and the bank for using of the overdraft facility available with the bank, then the account holder can use it. In fact, it is a kind of a short-term credit extended to the account holder and has repaid back. credite offered on such basis attracts a certain amount of interest for the account holder.
Overdraft facility is usually offered to businessmen and companies who may need short-term credite from time to time to make payments until their own payments get credited to the account. The credit given through the overdraft facility can be used by the account holder any time. The bank intentionally offers this kind of credite to customers so that it can earn interest out of it. There are schemes for high end customers offering credit through the overdraft facility.
Overdraft can occur for a number of reasons, other than just being an extension of intentional loan offered by the bank. Banks sometimes keep a sum of money as a deposit as a form of security while extending overdraft facility to customers. The overdraft limit fixed by the banks is based upon the total amount of the deposit made by the customer in the bank.
Banks could possibly provide the overdraft facility either for a check payment or for withdrawal of money from the ATM. For a check payment, if it has to be credited to another account, the bank may not reject it but would extend it as part of the overdraft facility for the customer and then charging the rate of interest as the arrangement has been made. For ATM transaction, a similar arrangement is also made and the customer has the facility to withdraw the amount as fixed by the bank.
Overdraft can happen due to some manual or electronic errors as well. Electronic payments could have been initiated at one end, but the time taken for actual debit may take some time. During this time, it is possible that another pending debit has taken place in the same account and there are no funds to make the electronic payment. Sometimes, the checks could also be misread by the bank official and debit a higher amount from the bank and consider it as an overdraft. But this could be settled later and the bank would make the necessary correction accordingly.
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