Overdraft Limit

Banks and other financial providers offer overdraft services to help their customers make essential purchases when their balance on their current account falls to zero. Whichever lender a cardholder chooses when taking out this facility, an overdraft will always be subject to a pre-arranged limit.

Overdraft Limit Definition

What is an Overdraft Limit? It can be defined as the maximum amount of additional funds that a bank is prepared to let their customers borrow from their current account after their account balance has reached zero. Overdraft limits are generally available on most bank accounts, though special conditions may apply to business overdrafts and student overdrafts.

Applying for a New Overdraft Limit

To obtain an overdraft, a cardholder must first request one by visiting or contacting their lender (banks and building societies generally offer overdrafts), and if approved, both parties will agree on a suitable overdraft limit to suit the customer’s needs.  This cap will depend on the circumstances of the individual, and providers will take into account factors such as age, employment, any earnings, credit rating and the level of debt their customers may already have.

Working within an Overdraft Limit

Typically, overdraft limits start in the range of a few hundred pounds. People who require an overdraft to pay for unexpected bills or essential repairs to their home usually take out an average overdraft limit of around £500 to a few thousand pounds, but this cap can be a lot higher. Whatever maximum overdraft limits are available on the market, account holders will eventually be required to repay the entire amount borrowed along with interest and any additional overdraft charges.

An overdraft limit acts as a safety net so customers are not persuaded to spend more than what they can afford to pay back. While within this limit, some overdraft products offer interest free deals up to a certain amount, a set timeframe or for particular groups of people. Student accounts, for example, often allow students to take advantage of interest free overdrafts for the whole term of their studies, whatever their maximum overdraft limit is.

Exceeding this limit, however, could result in huge consequences for the cardholder. If a person withdraws funds beyond what they are authorised to do so, the account provider is likely to charge much higher overdraft rates on the whole amount rather than on how much they have surpassed this limit. Additional charges for going over an overdraft limit may also be levied onto the customer, resulting in one incredibly expensive overdraft.  Such unauthorised overdrafts are generally considered to be much more expensive to run than authorised overdrafts, and will generally have a detrimental effect on the borrower’s credit rating.

Renegotiating an Overdraft Limit

Those finding themselves regularly reaching their authorised limit may want to consider contacting their lender for a suitable solution. After a period of up to 12 months, a bank will usually review a customer’s current overdraft facility and could offer them a better deal. Lenders are sometimes even prepared to extend average overdraft limits to a higher amount depending on the state of a person’s current finances.

For those who have exceeded this capped amount before, however, there will probably not be any such solution until they get their finances back on track. Cardholders who are still struggling with making regular payments are advised to get in touch with their lenders as they may want to consider going down a more long-term borrowing route, such as applying for any loans that may be available from their own lender or any others in the marketplace. If they are not available, it is advisable that borrowers seek advice on debt management.