How Does a Bank Overdraft Work?

Bank overdrafts can be a good buffer for those who need extra flexibility with their personal finances. For many people in the UK, with the cost of living increasing, an extra few hundred pounds in the short term can make all the difference.

Credit cards and overdrafts are two of the most common ways in which to borrow money from a credit provider in the short term and before your next payday.

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Overdrafts and outstanding payments on most credit cards will usually incur some type of charges and fees, which should always be considered before progressing with either of these options.

What is a Bank Overdraft?

A bank overdraft is a specified amount of money you can spend beyond the amount that is currently available in your bank account. Often, a borrower may overdraft their account when they need a small amount of money, such as if they need to borrow £400 or potentially even less. Your bank will agree to a certain limit up to which you can spend beyond the money in your bank account.

This means that for a certain period of time, you can continue to spend even when there is no money in your bank account.

How Does An Overdraft Work?

Depending on your bank, there are usually two different types of overdraft: an authorised overdraft or unauthorised overdraft.

  1. Authorised overdrafts refer to overdrafts where the terms are organised with the bank before you have overdrawn money. You agree to a limit with your bank and subsequently can spend money up to the agreed limit.

  2. Unauthorised overdrafts are bank overdraft options that have not been pre-arranged. This usually happens when you spend more than you have in your current account without it being agreed in advance.

Overdrafts will vary between banks, some of them offering the option of an overdraft free of charge and others offering it as a paid service. Since April 2020, banks have had to apply a consistent APR across all overdraft facilities, so there is no variation between overdraft systems regarding daily or monthly fees.


Individuals should only ever use overdrafts as a form of short-term or occasional credit, not additional money ready for spending. Even if you have a 0% overdraft fee (where no additional fees will be charged), this service should not be relied on for extra spending.

What Overdraft Limit Will I Get?

Your overdraft limit in the UK will depend on a range of factors, including the bank account that you currently have and your banking institution. Many banks offer overdraft services, but the exact amount and fees will vary.

Typically, basic bank accounts and accounts for individuals who have previously undergone bankruptcy will likely not come with overdraft services.

Overdraft services are at the discretion of the bank and will depend on an individual’s creditworthiness. Banks have the right to assess individuals on a case-by-case basis to decide whether or not to offer overdraft services and up to how much.

How Expensive are Overdrafts?

Like needing to borrow money online, overdrafts also incur additional fees. Therefore, you should check and compare any associated fees as there is a great deal of variability between banks.

You should consider your own regular overdraft usage and calculate what you might be charged across different banks for the same amount. Take into consideration all the extra costs in order to work out how much it would cost you in the long run.

Can You Avoid Overdraft Charges?

If you switch to a bank account with a fee-free overdraft that has the limit you need, you should be able to manage your overdraft charges well. It could be that you find yourself dipping into your overdraft unintentionally. If this is the case, many banks offer a service that can alert you to when you are nearing your limit and save you from going over.

Depending on your particular financial circumstances and how much you are charged for your overdraft, it may be a sensible solution to turn off overdraft services. Some banks allow you the option to turn off overdrafts to avoid any overdraft fees. In these cases, if you don’t have enough funds, your card will be declined.

How Do You Pay Back an Overdraft?

If you are in a position to start paying back your overdraft, you should do this as soon as possible to avoid a potentially expensive debt. If you have an outstanding overdraft, you may consider prioritising it as a debt to address as soon as you can, rather than something to push off into the future.

Unlike other types of credit or loans, overdrafts do not have a repayment plan, so it is your responsibility to manage the debt.

Before you pay back your overdraft, you need to first determine exactly how much you owe. Put together a budget looking at how much you are earning and how much you are spending in order to decide what you can afford to pay back per month. Using this information, you can work out a logical repayment plan and work towards reducing your overdraft as soon as possible. Having a fixed date in mind to have paid off the total balance will help keep you on track.

Author Maggie Clarke
Maggie Clarke Content Ops Lead
Maggie leads the content operations team at She is an expert on personal finance, by way of a lifetime of gathering practical knowledge on what to not do with your pocketbook. When not blogging about money, Maggie can be found rambling through the roughest terrains. She considers herself charming yet troublesome and would love to meet you someday, just not today.
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