The Truth About Free Account Overdrafts

Overdrafts agreements on bank accounts can be very onerous for the borrower if not used carefully. Though the bank may claim to offer free overdrafts, the “free” tag implies only that there will not be any administrative or closing charges but there are still interests charged on the money borrowed.

Overdraft Explained

An overdraft is the amount of money by which a check, a payment or a withdrawal exceeds the funds on deposit in your bank account. You can think of it as a loan by which you are given authorization by the bank to keep making drawings on your checking account up to a pre-agreed limit.

This line of credit lets you have a fixed amount that can be used fully or partially to make payments or purchases and then can be repaid in any way. The money is always available and can be withdrawn again at any time as long as the limit is not exceeded.

All type of Account Overdraft Agreements charge an interest rate over the money lent, just like any loan or line of credit. The interest rate charged, due to the unsecured nature of the loan, is rather high.

Regular Account Overdrafts Charges

Commonly, regular account overdrafts charge not only an interest rate for the amount lent but also a fee for the overdraft provision. This fee is variable from bank to bank but is usually justified as administrative costs or closing costs. The sum can range from $10 to $30 each time your account goes below zero and can also be claimed on a monthly basis.

The interest rate on the other side, will range from 15% to 25% APR of the money lent. If you divide this percentage by 365 you can get the daily interest rate you will have to pay for the overdrawn money. All in all, though rather high, this kind of loan is just as expensive as using your credit cards to get finance, sometimes, even a bit cheaper.

The problem, however, will appear when you exceed the limit of your overdraft agreement. You will incur in penalty fees that will take your overdraft even further and you will have to pay higher interests on the whole amount (the sum included in the limit and the sum exceeding the limit). Moreover, sometimes the banks increase the penalty fee every month, getting you into a vicious circle of debt. Most of the banks stipulate that if the amount agreed is exceeded by 10% they can take collection measures over the whole amount indebted.

The Free Account Overdrafts Catch

Having apparently no costs, these agreements usually charge higher interest rates in order to compensate for the lack of fees. Moreover, the penalty fees charged are also significantly higher and this turns free account overdrafts agreements into a much bigger danger than regular account overdrafts. If you ever incur in an unauthorized overdraft, you will need to deposit enough money in order to be below the limit again as soon as possible. Otherwise your debt will escalate quickly and you may end up being unable to repay it.

Devora Witts is a certified loan consultant who instructs people regarding Personal Loans and Unsecured Loans. To get aid with your financial situation you can visit her at http://www.badcreditloanservices.com