What "overdraft" means in finance

An overdraft is a type of credit facility that allows an individual or business to borrow money from their bank account beyond the available balance. An overdraft occurs when a person or business withdraws more money than is available in their account.

An overdraft is a form of short-term borrowing that can be used to cover unexpected expenses or cash flow shortages. Instead of being declined for insufficient funds, the account holder is allowed to go into a negative balance up to a certain limit, which is agreed upon with the bank. The account holder is usually charged interest on the amount of the overdraft.

Overdrafts can be either authorized or unauthorized. An authorized overdraft is a pre-agreed amount that a bank has authorized for an account holder, and the interest rates and fees are typically lower. An unauthorized overdraft occurs when an account holder goes over their limit without prior agreement with the bank, which may result in additional fees and higher interest rates.