The concept of «overdraft» has already firmly taken root in the banking sector. Each of us has a bank card, and most of us do not even have one. In almost every case, bank employees offer us to connect the “overdraft” service. What does it mean? In this article, you will learn about all the nuances of this service and will already be able to clearly conclude whether you need it or not.
1. What is an overdraft on a card in simple words
Overdraft (from the English «overdraft» — «overspending») — this is one of the forms of providing a loan to a client on a bank card. The bank gives a certain limit of funds on the card, which the client can automatically borrow if necessary.
We make many purchases non-cash using bank cards (most often using debit cards). It happens that own funds are not enough to buy some expensive goods. For example, household appliances, jewelry, travel. In order not to take consumer loans every time, banks have come up with a mechanism that allows the customer to make a purchase with an automatically issued small loan.
An overdraft refers to a special form of short-term bank loan. The bank gives the client the opportunity to spend more than what is on his debit card. At the same time, no approvals or trips to the bank are required from the client. Credit is issued automatically in case of excess of own funds on the card.
You can use an overdraft when buying any product, so such a loan is not targeted. Connected only with the consent of the client. By default, this service is not available on debit cards.
Those who are familiar with the principles of credit cards can find a lot in common with overdraft. After all, credit cards also make it possible to take short-term non-purpose loans. The truth in favor of credit cards is that they usually give cashback when paying.
- Available (standard conditions);
- Technical (unresolved, which arose in the event of a bank error, incorrect debit, etc.);
- Salary (installed on salary cards);
- Micro (a small amount for a deposit);
- Collateral (you can leave a deposit in the bank: real estate, car);
- Umbrella (designed for a network of companies);
The first overdraft was issued in 1728 (nearly 300 years ago) when William Hog was allowed to take £1,000 more than was in his account. The loan was issued by the Royal Bank of Scotland, which had opened in Edinburgh the year before.
2. How much does the overdraft service cost?
As you know, credit services cost money. Due to the great competition in the banking sector, it is easy to find conditions that give a «grace period» during which you can take a «loan» without interest. As a rule, such a period is about 30-90 days (depending on the particular bank).
The grace period allows you to take money from the bank and return to it the same amount as they took without paying interest. It seems to be the most profitable and convenient, subject to the only rule, but a very important one: pay the payment on time.
If the conditions of the grace period are violated, then all interest for using the grace period, as well as a fine, will be charged. In this case, the benefit of using the loan is greatly reduced. Overdraft interest is usually 20-50% (almost like microloans).
Interest for the grace period is not paid only in case of timely repayment of the debt.
In general, you do not need to pay extra for the possibility of connecting an overdraft. This opportunity is given to the client free of charge in case of approval.
3. Terms and use
3.1. What is the overdraft limit
Overdraft is not «rubber», it has a strict credit limit. Depending on the bank and its conditions, the amounts may be different. Most often they are tied to salaries or other receipts in the account. For example, if the salary is 50 thousand rubles a month, then the limit may well be 300 thousand rubles.
The overdraft term is short: up to 12 months, but during periods of special offers and promotions you can find more.
3.2. Requirements for the borrower
When considering an application for a limit loan, the bank will focus on the following points:
- Age (working age is considered);
- Minimum income;
- Having a stable job;
- Net credit history;
3.3. How to connect an overdraft
To connect, you may need to go to the bank to sign the contract. This will require the following documents:
However, there are also «lighter» options. For example, Tinkoff may consider connecting the service remotely.
4. The difference between an overdraft and a consumer loan — comparison table
An ordinary citizen often has a desire to compare an overdraft and a regular consumer loan. Let’s go over the points and compare them.
|Loan terms||Small (under 12 months)||Wide range (up to 60 months)|
|How to obtain||Only at the time of purchase||In the bank|
|extradition||No trips to the bank||Collect documents and wait for approval|
|Use||non-purpose loan||Often the bank is interested in what the funds will be spent on.|
|Interest||Slightly more (20%-50%)||Slightly less (15%-30%)|
|Pledge||Possible without a deposit||With collateral you can reduce the interest rate|
|Insurance||Not required||Many banks force life insurance|
|Payments||Written off automatically||Requires a special account|
5. Pros and cons of an overdraft
- Possibility to take a non-targeted loan;
- Can be used regularly
- Lack of collateral and guarantors;
- Use only when necessary;
- Borrowed money can be taken at any time;
- Money is issued to the same card that you use;
- There is a grace period when the loan becomes free for a while;
- Motivation to spend more;
- There are late fees.
- High interest on loans;
See also the video about «Overdraft. Financial Literacy»: