Temporary Overdraft: Explanation, Types, Usages, Limitation

Introduction

We all know life situations are uncertain. Sometimes people get short with money due to unexpected personal problems, urgencies, and fulfilling an emergency financial obligation. The banks understand the financial need of their clients.

In order to help the customer’s banks introduced this credit facility is known as a temporary overdraft.  The lending institute grants finance to individuals when a person is out of savings.

What is meant by Temporary Overdraft?

As the name suggests temporary overdraft is a short-term fund provided to people funds to those who are in need of immediate money.

A temporary overdraft or TOD is a convenience given to borrowers to withdraw extra cash for a short time. A person could takeout money from their personal bank account.

Temporary overdraft duration generally lies in-between 30 days to 90 days. Let’s consider a situation if a bank has given his member 45 days overdraft period and the person has taken this facility then it is an obligation for him to retune this overdrawn facility to the bank under 45 days.

Temporary overdraft rules, policies, withdrawal amount limit, and return policy vary from bank to bank.

A person can still enjoy this amazing credit option if his/her bank account balance is zero or below.

The best thing about this credit option is an individual does not requires to offer assets such as bonds, shares, cars, houses, or insurance policies, etc. to the bank.

This credit solution is different from a loan but yes the interest rate is charged by the banks. The interest rate can lies from 0% to 39%. On each overdraft withdrawal, the fee is charged from the customers.

See also  What is a Forward Contract? And How Does it Work?

Working of a Temporary Overdraft

An overdraft facility is offered to customers in an opening of a bank account or a customer can apply by themselves from the bank account relationship manager.

The amount of short-term depends on the bank overdraft limit and the personal need of a customer. An overdraft borrower is required to pay fees and interest on the use of this credit.

Types of a Temporary Overdraft

Temporary overdraft is divided into two types;

1) Arranged Overdraft

An arranged overdraft is also known as an authorized overdraft in which the borrowing amount is pre-agreed.

A person can withdraw credit to a certain limit and he charged an already set premium rate. 

2) Unarranged Overdraft

The alternative name of an unarranged overdraft is an unauthorized overdraft in which the borrowing amount is not pre-agreed.

In this a person over the arranged overdraft limits. The bank charge fee for that would negatively affect the credit score. 

Benefits of Using Temporary Overdraft

A temporary overdraft is useful to arrange finance in an unexpected event such as medical expenses, urgent payment submission to the creditor, unplanned travel expenses, unexpected death in the family, accident, kids’ education fee payment, and business failure, etc. There are many other advantages of availing temporary overdraft facility;

  1. This credit facility helps the individuals to cover the short-term financial shortfall.
  2. Temporary financial support provides stability in the life of a person.
  3. It helps in the expanding of businesses
  4. Overdraft is cheaper than the loan that is why it is affordable.
  5. It helps in fulfilling the urgent need of capital
  6. TOD is quickest to arrange and useful in an emergency.
  7. This financial support brings positive outcomes for the credit users.
  8. Overdraft is flexible it saves time and extra paperwork formalities during loan taking.
  9. In some TOD protection cases bank uses its own funds to pay customer overdraft.
See also  Types of Financial Analysis: 11 Difference Types

Limitations of Using Temporary Overdraft Facility

  1. Overdraft financial credit has limits. The amount of capital customer access is much lower than a personal loan.
  2. The interest rate or fee charged by banks could be higher. Due to limited finance, these fees are sometimes expensive to pay for the borrower.
  3. The bank charge fee if the customer exceeds the overdraft limit without authorization.
  4. It is not a good option for long-term personal or business purchases.  
  5. The bank can apply a ban on repeat overdraft usage.
  6. The customers strictly need to follow bank overdraft terms & conditions.

Conclusion

A bank account overdraft is the best opportunity for an individual to fulfill short-term monetary needs.

The bank allows taking authorized and unauthorized loans according to personal circumstances. It provides people with financial help in an hour of need or trouble. The account holder can still withdraw money when the account has insufficient funds.

Scroll to Top