Overdraft – Everything To Know About Overdrawing Your Account

You may or may not have experienced an overdraft before. The concept occurs when you overdraw your credit account. Whilst it may sound negative, there are ways to utilise overdraft to your advantage.

Several concepts work alongside overdraft in the financial environment. Monzi is here to discuss all things overdraft and what happens next if you overdraw your account.

Please note, specific ideas and products presented in this article may not be on offer by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What is an overdraft?

Lending institutions provide overdrafts. Essentially, when your credit account reaches zero, your institution may grant you an extension of credit. This will allow you to continue withdrawing money when your account does not have sufficient funds for purchases or withdrawals. Despite the connotations and general attitudes towards owing money, an overdraft is not always negative.

You can utilise a bank overdraft between paychecks, or to help fund your small business if necessary. However, your bank expects that you will repay the overdraft as soon as possible. You have to apply for an overdraft account if you think this service is something you may require. However, in some instances, your bank may grant you one spontaneously. An overdraft fee may accompany this.

Is an overdraft a loan?

Yes, an overdraft, regardless of whether intentionally set up or given by the bank, is a loan. Typically an overdraft gives you access to less money than if you opted for a personal loan. However, an overdraft does provide you with room to move if you have an expensive month with atypical costs.

As with any other loan, dipping into your overdraft account will result in accumulating interest; however, you only pay interest on whatever you use from the overdraft account. If you have a $2,000 account but only spend $200, you will only pay interest on the $200 spent. Your interest will usually be less than a personal loan but greater than credit card interest rates – this will vary by bank. It is rare that your overdraft account will have much of an impact on your credit score. This will only happen if you greatly exceed your limit or stop making your repayments.

If you decide you need access to more money than what an overdraft account can provide, the Monzi lender-finder may be able to help. Whether you need small cash loans, easy approval loans, or even a small business loan, why not see how we can help you?

Can you purposefully overdraft?

Yes, you can intentionally overdraw. If you think this feature may be helpful to you, you can arrange an overdraft account to fall back on. Of course, the goal is always to stay within your credit limit and not create further debt. However, mishaps happen, and if you operate in an unpredictable environment, being able to overdraw can be beneficial.

You can apply for one of these accounts anytime and, depending on your bank, you may be able to close this account at any time, too. Some other reasons you may want to purposefully overdraft could include:

  • You operate a seasonal business that has periods of low cash flow.
  • You need immediate access to extra funds without needing short term loans.
  • The interest of a credit card is not worth it for the extra cash you need.

These are all valid reasons for requiring the overdraft option. However, don’t write off a personal loan just because it sounds scary in theory. Monzi offers several loan options and a network of lenders who may be able to help your needs.

How do I apply for an overdraft account?

Applying for an overdraft account is now a pretty simple concept. While it varies by bank, the process may simply require you to complete your bank’s application form. Once you’ve done this, you can either return it to your local branch, post it, fax it, or email it back.

From there, you may have to be patient while your bank assesses you and your application. Generally, responses do not take that long; however, patience is always your ally. Before you submit your application, please ensure you have read your bank’s eligibility criteria. This often requires you to be 18 or older, an Australian citizen, permanent resident, or in possession of a valid visa. Some banks may also require you to be earning a minimum annual income.

You may be able to speed up the process by compiling details of your income and employment, your identification, and your bank’s customer registration number. Not only does this make it easier for the bank, but being prepared will also save you the hassle of chasing down information later in the process.

What if you don’t use your account?

If you are going to open one of these accounts but don’t end up using the feature, this does not mean you simply don’t pay anything. The bank puts credit aside for you to access when you open an account. Considering this money is sitting idly, this is costing your bank money. Therefore if you are not utilising this account, you can still expect to receive a reasonable fee.

Therefore, if you have an overdraft account consistently open, you want to ensure that you will use it. For this reason, it may be wiser to increase the limit on your credit card if possible. Or ensure that you will be using this facility for a business purpose where it is more likely to be used. However, even in this situation, you may instead opt for a business credit card. As with all financial decisions, it is wise to reflect on yourself and choose the option that works best for you. If you think you won’t use an overdraft consistently or may struggle with the repayments, investigate the alternatives.

Is an overdraft good or bad?

Overdraft is neither good nor bad. Depending on your circumstances and the reasons you are utilising the account, it can be either. There are some pros and cons to one of these accounts that are worth discussing. Here are some of these:

Advantages

  • You can apply for an account at any time. If you don’t have an account but foresee the need for one, you can do so whenever suits you.
  • Limited interest. You won’t pay interest on the whole account, only what you use.
  • Can avoid bounced cheque fees for limited account funds. A bounced cheque is a cheque you write that doesn’t have the funds available to process.
  • Suitable for business operators who operate seasonally.

Disadvantages

  • Overdraft is still a loan and will need to be repaid, plus interest.
  • You may receive a sense of false security from one of these accounts, work to avoid falling into this headspace.
  • You can incur fees for not utilising this account. Ensure you require it.
  • Fees for going over the overdraft limit are also a very real possibility. Manage your funds responsibly.

Don’t make off the cuff financial decisions. If you would like to understand better how the overdraft facility works, reach out to your bank for further information. For more details on the various bank accounts available to you, check out MoneySmart’s bank accounts page.

Business overdraft

A business overdraft account is designed specifically for business purchases and can be helpful for increased flexibility when managing your business. You can use this facility for paying timely wages, and bills, even if you are waiting for client payments that have not come through.

If you operate a seasonal business that performs better in certain parts of the year, a business overdraft account can help you get through the slow stages. Like any other overdraft account, frequent repayments and interest on the amount you use will still apply. You may be able to have either a secured or unsecured business overdraft; however, securing it may give you access to a higher limit. You will have the options of securing against a residential or business property, or an asset. Keep in mind that if you cannot repay your secured line of credit, the bank will be able to repossess this property or asset.

Also, note that you always have the opportunity of unsecured business loans as an alternative when you are in a tricky situation. Monzi may be able to help find you a lender in as little as 60 minutes if you need cash fast.

Overdraft facility

If you see this term around in your research, don’t be put off by it. It is simply a synonym for an overdraft account and may be used interchangeably. The facility itself allows you to access overdraft from an existing account once it is empty.

Personal overdraft

If you are looking for a personal account, not a business one, this option is also available for you. Better yet, you can add this feature to a debit or credit account. Having a personal overdraft as an option can give you peace of mind, especially if you are between jobs or struggling with a lifestyle change.

These accounts typically come with a minimum and maximum amount and potential application fees. Depending on your bank, you may also have the option of no minimum repayment. This means that provided you can keep your balance within the limits of the account, you can repay however much you want on the repayment date. This can be a great feature if money is tight. Keep in mind, though, that interest will accrue for as long as you are owing.

It’s always better to avoid debt. If you can manage without one of these accounts, do your best to keep doing so. An overdraft can be helpful, but it also opens you up to more debt. If you are currently struggling with debt, consider speaking to a financial advisor.

Bank overdraft in the balance sheet

If you have an accountant or do your accounting work, you may not know what an overdraft is classified as. A bank overdraft is a liability on your cash flow statements. This is because it is essentially just a small loan from your bank.

However, if your cash flow management is not as meticulous as an accountant’s, as a golden rule, try to avoid overdraft unless you know how to use it to its full potential. There is such a thing as good debt. This is any debt taken for an investment that will give you a valuable return. There is no shame in requiring a loan to get by; however, see if you are eligible for any Centrelink or government aid as a first step.

ATMs that allow overdraft

One helpful feature of an overdraft is that you can use it at ATMs. This means, provided you are within the limits of your account, you can take out the loaned credit as cash. Typically, withdrawing money with a credit card is called a cash advance.

Cash advances typically don’t show up on your credit report. However, multiple frequent cash advances can do damage to your credit score. Of course, if you are desperately in need of some cash, by all means, utilise the overdraft withdrawal feature. Keep in mind that doing so shouldn’t develop into a frequent habit, and if you feel like it is, you should look for professional aid to rectify this reliance.

Overdraft at an ATM

Interest rates

Depending on the bank you are with, interest rates for an overdraft will vary. Another influencing factor is whether or not you are planning on securing your account. If you are, the asset you use may cause variance in the rate. For example, the rate may be lower if you use a residential property instead of a commercial property as security. This is because the bank believes you are more likely to want to hold onto a residential property than a commercial one.

Note that it is not only the interest rates you should be comparing but also the accompanying fees. Both the application fee and the annual fee may be pretty intense. Don’t forget this when applying, as you could be required to pay an application fee of $0 to $3,000. Or annual payments of $0 to $3,000. A comparison tool will be your friend. You can access one of these for free online, and it may help simplify your search for a helpful overdraft account.

Can you overdraft if you have no money?

The entire concept of overdraft revolves around the idea of you having no money. This might not mean you have nothing to your name. Instead, it means you have no money left in the account you have linked your overdraft facility to.

If you only have one spending account and prefer to dip into overdraft rather than your savings account, this is entirely understandable. If you have multiple spending accounts and manage your money well across them, you may not require an overdraft account at all.

Maybe you need extra cash but can’t justify the steep application fees for an overdraft facility, why not investigate Monzi instead? You won’t have to pay us a cent to match with a lender. Whether you need small loans, medium loans, or large personal loans, why not look into how we can help, rather than calling on your credit card or an overdraft.

Limits

As with most credit accounts or applications for credit, there are limits. In this case, there is a minimum and a maximum limit. Your minimum is usually around $2,000. As for the maximum, this can vary wildly, with some banks offering up to $40,000 for personal overdraft. This is not super common. Examining your financial history helps your bank come to a decision. As with several other limited accounts, whether or not you can access more funds requires you to undertake a credit assessment. If you manage your money seriously, you are more likely to receive access to a higher limit.

If you receive a lower limit than anticipated, allow time to demonstrate to your bank that you can make responsible financial decisions. This will enable you to boost your argument with evidence, should you seek to increase the amount.

For business overdraft, on the other hand, you may be able to overdraw multiple millions. However, this is strongly advised against; doing so only delays the impact of the issues. You may also have to discuss this with your bank beforehand to ensure you have permission to do so.

Fees

As previously stated, when looking for a good account for you, consider the accompanying fees. These are the application fees, annual fees, interest, and extra costs for not using any of the money in the account.

Regarding other features that may be useful, consider whether there is a maximum loan term (often for business accounts) and whether mandatory repayments are necessary. The ideal overdraft account is most likely one that that has low fees and an average-sized limit. This will save you money in the long run and still give you access to a reasonable amount of funding without the added danger of significant debt.

Temporary overdraft

A temporary overdraft is an alternative to a personal overdraft. It is quick as it is designed to cover short term financial issues and has a repayment term of around 45 days. The standard fees still apply; however, they may not be as steep considering the term and the amount are smaller.

You won’t be able to use a temporary overdraft for any business purposes, refinancing debt, or paying existing loans. However, as this is a reduced overdraft, you won’t be required to secure it.

How do you make your repayments?

Repaying your overdraft is simple. All you need to do is put money into the transaction account it is attached to. Whatever money you put into this account will first go towards repaying your overdraft. Once this is complete, your account will start refilling with your own money once more.

For this reason, if your account is a personal one, not a business account, it is wise to only have a small overdraft loan. This way, you aren’t funnelling your paycheques into loan repayments. The sooner you can get back to spending your own money, and not the bank’s credit, the better.

How long can you stay in overdraft?

How long can you have outstanding overdraft repayments? Well, this depends on the kind of account you have active and the conditions of your bank. If you have a temporary overdraft, you will only have 45 days to repay the balance. If you have a personal overdraft, you could have upwards of six months.

However, some banks may not have a minimum monthly repayment requirement. This means that as long as you repay some quantity by the repayment due date, your bank will be happy. The catch is that the longer you take to repay your debt, the more you are allowing the interest to accrue. You will also have to pay, in some instances, an overdraft usage fee to keep the account open. Whilst banks may warn you not to take a long time repaying your debt, it suits them if you do. This is because your overall repayment will be much larger than what you initially borrowed. Don’t give them the satisfaction. Repay what you owe promptly.

What happens if you don’t pay your overdraft?

If you decide not to repay your account’s debt and leave an account overdrawn, there are consequences. If you choose to do this because you cannot make the repayments, it is best to contact your bank for information on how to proceed. They may be able to help you by making a repayment plan. Likewise, if you feel this debt or fee is a mistake, contacting your bank to raise the error is the first step. If you still disagree with what your bank has to say, consider contacting a financial ombudsman.

However, if you choose not to pay your overdraft, you could be looking at receiving a default on your credit report, or legal repercussions. Any default on your report will injure your average credit score Australia, and make applying for future loans difficult, as may court writs for financial offences. Please consider the ramifications of your actions before deciding that you simply don’t want to make your repayments.

Can you overdraw on debit?

This isn’t always permitted; however, occasionally, your bank may allow you to overdraw your debit account. It is always wiser to know what is in your account, so you don’t enter this situation where you have insufficient funds. However, overdraft on a direct debit transaction can be helpful to you in some circumstances. Just because a bank grants you this ‘privilege’ once or multiple times, does not mean it will happen again in future.

One useful option some banks may offer is the opportunity to avoid the overdraft fee by depositing money into your account by a specific time, on the same day the transaction occurrs. This means that if you accidentally neglect your spending account’s balance and go negative, adding some money to it from your savings will quickly rectify the mistake.

Overdraft forgiveness

If you are struggling to repay your overdraft, the first thing you should do is contact your bank. It is unlikely that they will completely forgive the debt; however, they may help you manage it. Neglecting this debt would be a mistake. If you don’t cooperate with your bank’s repayment requirements within 60 days, your bank may take measures to correct this. This may mean that they will seek legal action against you, forcing you to make your repayments, or they will contact your credit reporting company and add a default to your report.

If you feel as though the allegations by your bank are wrong, there are ways for you to get help. You may either contact the Financial Ombudsman Service Australia or the Credit and Investments Ombudsman Service. If you feel like you may struggle to receive the help you need from these services alone, contact Financial Counselling Australia for aid.

Does Monzi use overdraft?

Monzi doesn’t provide credit for overdraft. We do, however, offer you the chance to match with a great lender through our lender-finder. Our service is 100% online, meaning whether you’re after car loans or personal loans, if you have an internet connection, we can help you out.

All you have to do to get started is click ‘apply now’ or scroll to the top of the page and use our slider tool. Once you let us know what you need and give us some information about yourself, it’s over to us. If possible, we’ll do our best to match you to a lender in as little as 60 minutes. Please note that for us to do so, you will need to apply within business hours. If we are successful, your lender will get in contact with you and take over the process.

It’s that easy, what’re you waiting for? Apply now, or if you still have some questions that need answering, contact the team at hello@monzi.com.au.

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