Overdraft – a necessary short-term loan

9 min read
Overdraft – a necessary short-term loan
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Before concluding an agreement with a bank for an overdraft service, you need to familiarize yourself with it. Managers often emphasize favorable conditions for cooperation, but it is also necessary to be aware of the pitfalls. Then we will consider what an overdraft is in simple words and what are its features.

What is an overdraft?

Overdraft is the provision of a short-term loan on favorable terms. The key feature is the presence of a limit that the borrower can use when there is not enough own funds for the purchase.

Overdraft loan is available to individuals and legal entities. In the first case, this is a targeted loan, which the borrower can use at any time and withdraw the missing amount. But for legal entities, a loan is provided in a non-cash version to the account so that the company can make payments on debts.

During the period of necessary and sometimes untimely spending, a salary overdraft will be a real salvation. Compared to other loans, the service is more affordable and profitable. For a financial institution, this is a less risky operation, because an overdraft on a card is tied to pensions, salaries and other payments that will be credited to the account sooner or later.

Overdraft types

Salary bank overdraft opens automatically. The advantage is that you do not have to visit the branch and supplement the application with documents.

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Anyone who has a salary card can count on this type of this service, and money is constantly being received for it. The limit on the use of funds is small and when the salary is received, it immediately overlaps. The amount of the overdraft depends on the salary received. You only need to pay for days of use. Regular customers can count on a low interest rate.

Technical overdraft is provided without financial condition control. However, you will have to provide a lot of documents. This option is suitable for Forex traders.

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Classic overdraft is provided in the amount of a fixed amount. When drawing up the contract, payment orders and possible costs are stipulated. To qualify for this loan, you must:

  • Cooperate with the bank for a long time;
  • Have more than 1 year of work experience;
  • Receipts must be regular – twice a month;
  • No debt on the account.

The amount is set in the amount of the monthly replenishment of the card, divided by two. Interest payments are minimal.

Advance Overdraft is provided to regular customers who have a high credit rating. The conditions for obtaining are the same as for the classic version. The limit is set on average for the last three months of receipts. The decision on cooperation and provision of services is made within a month.

An overdraft for collection is provided if there is a guarantor who must own the business by 50 percent. At the same time, a regular customer must work with the bank for at least a year. A decision on the provision of services is made only after a month. Otherwise, the conditions are the same – a clean credit history, constant credits to the account, etc. important. For the borrower to use income for 75% of the loan turnover.

What is a permitted overdraft?

It is assumed that after the borrower writes an application, the bank must set a limit on the funds that the client can use.

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Overdraft limit, what is it? It is formed depending on the constant amount of income. Most often, this is an overdraft for a salary project – the amount is 30-50 percent of incoming wages. As soon as the owner of the card spends everything on it, he can get into debt. As soon as the salary comes, everything will be closed again. For using this service, customers pay 20 percent per annum.

Granting an unauthorized overdraft

Unauthorized overdraft – when the client needs to spend funds on the account in excess of the established limit. In this case, other terms of cooperation come into play.

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Overdraft interest increases up to 60 percent per annum. Requirements for borrowers are becoming more stringent. If it is not possible to pay the debt within the specified time, the banking institution will impose a large fine.

There are situations when technically an overdraft is possible:

  • Due to a technical error of the institution. Double the amount of the limit could be credited to the account.
  • With a change in the exchange rate;
  • On an unconfirmed operation. If the consumer made a purchase earlier, and the money was debited after other financial transactions. Having become familiar with the types of overdrafts, it will be easier to deal with such situations. Overspending is not common, but it is important to keep an eye on the state of the money in order to avoid the formation of unplanned debt. Some banks issue transaction statements that already include an available credit limit.

A technical overdraft for legal entities is not possible, because all transactions with funds are approved and documented.

Connection conditions and requirements for borrowers

Regular receipt of money is the main condition for providing a card with an overdraft. A potential borrower must fulfill three important points:

  • Having a good credit history;
  • The presence of a permanent place of work, continuous work experience;
  • Registration at the actual card service location.

After submitting a signed application, the bank begins to consider possible limits. Otherwise, each financial institution sets its own rules for receiving services.

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Each bank has the right to issue its own list of required documentation. The classic option is a passport, an additional identity document, TIN, an application, a questionnaire, a certificate of income – a package of documents that will be required to issue an overdraft card. The term of the grant varies, but most often it is twelve months.

In order to increase the volume of working capital, legal entities try to use not a loan, but an overdraft.

Firstly, the accounting department will appreciate it, because the overdraft does not require posting. Secondly, it is considered a preferential form of lending, which is provided to regular customers. A temporary solution allows you to purchase goods, make related payments, and then immediately cover all interest with the receipt of funds to the account. Legal entities must have a current account, the bank provides their cash services, and a separate agreement is drawn up for the provision of services.

How does overdraft work? What is the difference from a loan

An overdraft on a credit card is processed faster, is simple and has favorable conditions. To understand the differences, consider each option separately.

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Credit terms:

  • The term is set on the amount of the debt and the ability of the borrower to pay it;
  • You must repay the debt in even installments every month;
  • The loan amount may exceed your real monthly income;
  • The rate for using the service is negotiated at the time of signing the contract;
  • All money is issued immediately after all conditions are agreed and fixed on paper.
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A bank card with an overdraft is:

  • The term of using the service is a maximum of 2 years with full repayment of the debt every month;
  • The amount of the loan cannot be more than the monthly income in the form of wages or pensions;
  • Amount used overlaps as soon as payroll is credited;
  • Interest is paid for each day of use;
  • Immediate provision of funds after filling out an application from a regular client of the bank.

The difference between an overdraft and a loan is ease of registration, short-term use and a fixed amount.

Pros and cons of overdraft and what does it give to a competent user?

An overdraft debit card has its advantages and disadvantages.

The pluses include:

  1. At any time you can get the required amount and resolve the issue with an unplanned purchase;
  2. Interest is paid on the actual amount of the loan;
  3. You can use it regularly: after paying off the debt, take the amount again and so on in a circle, but strictly within the limit.
  4. Overdraft for business is a good opportunity to speed up the rotation of funds, block the payment of debts and not be left without work at an important moment;
  5. There is no need to look for a guarantor when applying;
  6. You can disable the service at any time;
  7. No paperwork in the design;
  8. An overdraft does not require posting in accounting, because it is not a loan at all. It will just be “-” on the current account.
  9. The Bank will constantly remind you in messages about the need to repay the debt, so you will not forget the deadline for its overlap.
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Having tried the service in action, everyone finds disadvantages:

  • The contract is concluded only for a year, then re-registration of the service is required again;
  • High bid;
  • Minimum repayment terms and amount within the limit;
  • The amount is repaid in full, not in installments;
  • Hidden payment when using funds, for example, for cashing out a fixed amount;
  • Read the terms of the contract, banks reserve the right to change the interest rate and reduce the payment terms;
  • The user may not even know that the Internet overdraft is already connected, and the amount of wages doubled is displayed on the account.
  • The credit trap – people eventually stop investing on time and the debt gradually increases.

Why is overdraft dangerous for individuals?

Overdraft for individuals is a real debt provocateur. Having an additional amount on your account, sooner or later you start using it. There is a habit to go into a permanent “minus” and over time the boundaries are washed away, a person is not able to make payments on time, the debt instantly grows.

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At any time, a person can use “easy” money and this drives the client of a financial institution into debt. The feeling of freedom and availability of funds causes excitement, which is why Western psychologists have long used such a term as “credit dependence”.

For individuals, this is the main danger in using such a service. If you do not lose your head and use it wisely, then the service really has its advantages.

How to disable

When it is issued and at the moment when the bank manager tells what an overdraft is, no one specifies how to turn it off. To refuse the service, you must write an application, provide documents when visiting one of the departments of the institution.

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Refusal does not entail any penalties. If something like this happens, it is urgent to go to court.

You can disable the service without leaving home, it is enough to have the Internet and a connection to Internet banking. Account management is easy from home. In your personal account, set the limit to the minimum amount so that it is impossible to use the funds. In case of emergency, you can remove the restriction on your own through your personal account.

Interesting facts about overdraft

  • A technical overdraft is possible when replenishing an account from another bank. In this case, the funds are immediately withdrawn, often the bank does not have time to complete the operation and the limit can be used twice.
  • Psychologists associate overdraft with “credit addiction”, so gamblers should be careful.
  • In order for the service to be useful, it is important to keep track of the balances on the account, the operations performed. Feel free to periodically visit the branch and request an extract to compare the receipt of funds and expenses. When signing the contract, consider your financial capabilities.
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