What is an Overdraft?

Understanding Overdrafts

Overdrafts are designed to help out when unexpected costs arise, and you need to borrow a sum of money for a short period of time. Read on to learn everything you need to know about the different types of overdrafts, what happens when you use them, and how to manage them effectively.

An overdraft is a form of short-term borrowing that is attached to your current account. With an overdraft, you can spend more than the balance you have in your current account, up to a set amount. When you go into your overdraft, you'll be charged interest on the amount you borrow.

Types of Overdrafts

There are two types of overdrafts - arranged and unarranged. They work differently and you can find out more information on both of these below.

Arranged Overdraft

An arranged overdraft is an agreement with your bank that allows you to borrow money, up to a certain limit, through your current account. You may have the option to add an arranged overdraft to your account when you open it, or you can apply for one later.

Depending on the terms of your arranged overdraft, you'll pay interest on the amount you borrow, the rate will be shown on your statement.

Overdrafts show as borrowing on credit reports. So, when you’re in your overdraft, you’ll see the amount owed on your credit report.

Unarranged Overdraft

When you don’t have an arranged overdraft in place and you spend more than the balance of your current account, your bank may allow you to borrow using an unarranged overdraft.

If your bank doesn't agree to an unarranged overdraft your payment will be rejected. If you spend money from an unarranged overdraft, you’ll be charged interest on the amount you have borrowed. Using an unarranged overdraft can negatively affect your credit score and make it more difficult to borrow in the future.

Learn most about how much you'll be charged for using an overdraft by using our Overdraft Cost Calculator.

Key Features of Overdrafts

When compared to other types of lending, there are some features that set overdrafts apart. This includes the length of the borrowing period, how much you can typically borrow, and the interest associated with this.

Short-term Borrowing

An overdraft is only for borrowing money in the short-term. It acts as a safety net if a sudden cost arrives.

They can be useful in instances when you have run out of money in your current account and need to cover expenses before payday.

Other types of borrowing, such as a loan or credit card, may be better if you need to borrow money for longer or would like regular monthly repayments.

Arranged Overdraft

Limit Your overdraft agreement will state the arranged overdraft agreed on your account and the terms. Your bank will determine your overdraft limit based on your credit profile, financial history and your personal requirements.

Be sure to monitor your account regularly so you can avoid overspending. There are a variety of tools that can help you better manage your account – you can find more information on these in the ‘How to manage your overdraft’ section below.

Please be aware that all overdrafts are subject to eligibility and affordability.

Interest and Fees

Overdrafts tend to have higher interest rates compared to other types of borrowing like a loan or credit card, which is why they’re more suitable for short-term borrowing.

The terms of overdrafts vary, depending on the lender. Typically, you’ll pay a set interest rate on the amount you borrow on the days you use it until you have paid off the balance in full. You won't be charged interest on days your account is in credit. Depending on the type of account you have, your overdraft may have an interest free element and you'll only be charged if you spend more than that.

Use our Overdraft Cost Calculator to explore the different costs for using an overdraft at TSB.

How to Manage Your Overdraft

• Although an overdraft can be a useful tool to cover unexpected expenses, it’s important to monitor your account to help you stay in control of your overdraft.
• Keep regular track of your spending: Monitor your balance regularly so you have a clear idea of how much money is in your current account.
• Plan your Standing Order payments and Direct Debits: Set your standing order and Direct Debits to come out of your account shortly after you get paid, so you know how much money you have until your next payday.
•  Pay off a fixed amount each month: Make a plan to repay your overdraft, start with a fixed amount that you can factor into your household budget. Some banks will have the tools to help you do this.
• Pay off extra wherever possible: If you can, make additional repayments to your overdraft to reduce your balance quickly and minimise the amount of interest you are paying each month.
• Receive text alerts: With TSB, when you open a current account and provide your UK mobile number, you'll automatically register for text alerts to let you know if you have gone into an overdraft, if your account balance is low, or if you don't have enough money to make a payment.
• If you’re using your overdraft a lot: Your bank might reach out to offer tips on how to use it less or invite you to get in touch for extra support.

You can find more helpful information on our overdrafts page and our ways to bank page.

For more advice, check out our Tips on Managing Your Overdraft.

18+ & UK resident. Lending is subject to application and approval. The rate offered will depend on our assessment of your personal circumstances. Overdrafts are repayable on demand