Glossary · UK
What is Overdraft?
A facility allowing you to withdraw more money from a current account than it holds, up to an agreed limit, usually at a set interest rate.
Full Definition
An overdraft is a short-term borrowing facility attached to a current account that lets the holder spend or withdraw more than the account balance, up to an agreed limit. An arranged overdraft is agreed in advance with the bank and typically charges a single, simple annual interest rate (following FCA reforms in April 2020 that banned separate daily or monthly fees and required banks to quote a representative APR, much like a loan or credit card). An unarranged overdraft happens when someone spends beyond their balance or agreed limit without prior agreement, or has no arranged facility at all; since 2020, banks can no longer charge higher rates for unarranged versus arranged borrowing, but going over an agreed limit can still trigger additional charges, affect a credit score, and in some cases lead to payments being declined or accounts being restricted. Some UK banks offer a small fee-free buffer (commonly £10-£30) before interest starts accruing. Because overdraft interest rates can be high compared with some personal loans, an overdraft is generally best used for short-term, occasional cash flow gaps rather than as an ongoing way to borrow.