What is an overdraft?

Overdrafts allow you to borrow extra from your current account on an arranged or unarranged basis. If you find yourself with no funds in your account, you may be able to arrange an overdraft with your account provider. An unarranged overdraft means that you can borrow extra money without agreeing to it with your bank in advance. If you’re wondering, “how do overdrafts work?”, this page outlines their fees, interest rates, and limits.

Overdrafts work by allowing you to borrow money from your current account by taking out or spending more than you have in there. This means that if you spend more than you have, i.e. your account is overdrawn, the bank or credit union will be lending you the money and they may charge you a fee for each day you don’t pay it back. For example, if your bank balance is €50, and you make a purchase of €80, you’ll have a €30 overdraft.

You can apply for an overdraft facility or you might be given one automatically with your account. An overdraft is a form of debt with your bank which can either be arranged or unarranged (also called ‘authorised’ and ‘unauthorised’). Typically, most people using overdrafts have an agreement with their bank or lender, and this is an arranged overdraft. 

Because an overdraft is a form of debt, it is repayable on demand. Always make sure you have enough money in your current account or a suitable arranged overdraft limit in place before any payments are due to come out of your account.

There are two types of overdrafts: arranged (or authorised) and unarranged (unauthorised).

An arranged or authorised overdraft means you set an agreed limit with your bank, allowing you to spend more money than you have. Your bank will typically charge you interest for an overdraft, and sometimes they will also charge additional fees.

An unarranged or unauthorised overdraft happens when you spend more money than you have in your current account without agreeing to it with your bank first. This could happen if you don’t have enough to cover outgoing direct debits or where you have already exceeded your arranged overdraft amount. 

Certain types of bank accounts have an overdraft built into them, such as a student bank account or graduate account, and these may be free to use or with lower fees.

Overdrafts range from €500 to €10,000, though some banks may offer smaller amounts to start with, like €200. If you’re applying for larger overdrafts over €10,000, you usually need to contact your local bank branch. How much you can borrow will depend on two things: 

• Your credit history - you can check your credit history on the Central Credit Register

• Your income – some banks only allow an overdraft up to that of your monthly income

If you’ve paid your bills on time and managed the account well in the past, you may be able to get an overdraft more easily than someone with poor credit history.

An overdraft is paid back automatically when enough money goes into your account, for example, when your wages or a payment are deposited. Your bank or credit union will usually set a deadline for when the full amount needs to be repaid.

In Ireland, banks often charge a one-off overdraft facility fee of around €25 - €30, which is due when the overdraft is first used. You may also be charged the same amount if you choose to renew the overdraft a year later.

If your account is overdrawn, interest is usually charged on the overdrawn amount. However, you may be able to repay the overdraft before the deadline to keep interest charges down.

In the case of an unauthorised overdraft, you may also be charged what’s known as surcharge interest. This comes on top of the interest rate on your agreed overdraft limit. Credit unions are the exception, as they typically only charge interest on the overdrawn money in your account.

Finally, you may also be charged a referral fee, which is what your bank charges every time you make a transaction over your overdraft limit.

In Ireland, the interest rate on overdrafts typically ranges from 11% to 15%, but this varies from one financial institution to the next. Keep in mind that interest rates are variable on bank overdrafts, meaning they can go up or down at any point. 

As an overdraft is a type of loan, it means that other ways of borrowing money, such as a personal loan, may incur less interest. It’s important to find the cheapest method of borrowing to avoid expensive or unexpected fees, or high interest rates.

An arranged overdraft is a good option to have in case of emergencies or as a short-term solution, and they can help account holders avoid unpaid charges when a direct debit or standing order returns unpaid. However, they can have higher fees or charges than other lending methods, such as personal loans or credit cards.

You can usually apply for an overdraft directly with your bank. This can sometimes be done via a mobile banking app, but you might otherwise be required to visit your local branch or call your bank.

Ensuring that your overdraft stays within the arranged limit is important. Otherwise, you may end up paying referral fees or charges. The following steps can help you keep control of your overdraft.

Keeping an eye on your bank balance, particularly if you’re getting low on funds, is essential if you want to avoid the costs associated with an unarranged overdraft. The easiest way to do this is to sign up for online banking if you haven’t already or sign up to receive text alerts when payments are due that may take you into an unarranged overdraft.

While you may wish to protect your savings, you may end up having to use them if your bank overdraft spirals out of control. It’s better to repay your overdraft before charges accumulate or before it affects your credit report. If you want to set up a bank account and can’t decide between a savings or a current account, you might want to weigh up how you plan to use the account.

If you have an overdraft or other debt, you might want to consider which one is costing you more in terms of interest and charges and try to pay that one off first. Find out how to get out of debt.

If you often spend more than you earn, an effective budget plan can help you visualise your finances and make necessary cuts. These could include things like unused subscriptions and any excessive living expenses. Ultimately, an effective budget plan can help you pay off your overdraft and live debt-free. 

If you find that your overdraft charges are higher than those levied by other banks, you might want to consider switching banks. 

If you’ve been charged fees you think are unfair or if you’re struggling to pay them, you might be able to get them back. As a first port of call, you might want to contact your bank to challenge the charges. Some banks write charges off as a gesture of goodwill.

An arranged overdraft is unlikely to impact your credit report, providing you don’t go beyond your overdraft limit or have payments refused. In fact, if you use your overdraft sensibly and regularly pay it off, this could potentially reflect positively in your credit report on the Central Credit Register.

An unarranged bank overdraft may cause lenders to see you as a risky borrower. It could be noted in your report and make it harder to access credit and loans in the future.

One way to avoid resorting to an overdraft is by having a pot of savings at hand. With Raisin Bank, you can compare high-yield savings accounts from a range of banks – all in one place. It’s free to sign up, and there’s no hassle when it comes to managing your savings.