An overdraft occurs when money is withdrawn in excess of what is available in your account. It is an extension of credit provided by a lending institution when an account balance reaches zero. Overdraft allows you to continue to withdraw funds from your account, even if it has no money or insufficient funds to cover the amount of the withdrawal.
Simply put, an overdraft is a set amount of money that a traditional lending institution, such as a bank, allows a customer to borrow when their account doesn’t have enough funds to cover it. The lending institution covers payments that would otherwise be rejected, or in the case of cheques, would bounce. There is interest on the loan, which similar to credit cards, is usually around 21% to 22%, and typically a fee associated with each overdraft withdrawal. These interest rates are very high, therefore, it is important to leave your account in overdraft for as little amount of time as possible.