Overdrafts

How overdrafts work and what you should know

An overdraft is a loan you arrange through your current account. It lets you spend more than your account balance up to an agreed limit called an overdraft limit, but it is one of the more expensive ways to borrow. Limits and terms may vary depending on your bank.

This page explains how overdrafts work, what interest rates and fees apply, the risks of going over your limit and how poor overdraft management can affect your credit history and future borrowing. Always check your bank’s terms and conditions for specific fees, requirements and repayment rules.

Why might you use an overdraft?

Overdrafts may not be the cheapest way to borrow, but they are flexible and useful for short-term credit and small, occasional expenses. For example, a short-term overdraft can help with extra costs like back-to-school, Christmas or holidays. 

If your income is irregular, an overdraft can help you manage your money. Avoid using an overdraft for regular, ongoing expenses, as this can lead to higher costs and debt. 

If you’re struggling to repay your overdraft or need help managing debt, you can get free, confidential advice from MABS, the Money Advice and Budgeting Service.

How do you repay an overdraft?

The amount you owe goes up and down depending on your spending and deposits. You repay your overdraft over short terms, usually between six and 18 months, and your bank sets the date for full repayment. You can clear your overdraft early to save on interest.

If you don’t clear your overdraft within the agreed time, it can damage your credit rating and make it harder to get another loan or overdraft. Using an overdraft often means paying more interest. 

Some overdrafts require your account to be in credit for a certain number of days each year, such as 30 days. Check your bank’s terms for specific repayment requirements and timelines.

What interest rates and fees apply to overdrafts?

You pay interest on the amount you owe at any time. Overdraft interest rates are usually higher than personal loans, usually ranging from about 11% to 15% depending on your bank. Unauthorised overdraft rates can be much higher.

Rates are variable and can change. Your bank must notify you in writing or in a national newspaper, and you’ll notice changes on your bank statement. Check your bank’s current rates and fees before applying for an overdraft.

What other fees and charges might you face?

Fees and charges vary by bank – check your provider’s fee schedule for details.