A bank overdraft is a financial arrangement that allows an account holder to withdraw more money than is available in their checking account, up to a specified limit. Essentially, it acts as a short-term loan provided by the bank to cover transactions when the account balance falls below zero. Overdrafts can be pre-approved or granted on an as-needed basis, depending on the account terms.
This financial tool is significant for individuals and businesses as it offers flexibility in managing cash flow. It helps avoid bounced checks, declined transactions, or payment delays, ensuring that immediate expenses can be met even if funds are temporarily insufficient. However, overdrafts generally come with fees and interest charges, making it important for users to understand the costs involved.
In summary, a bank overdraft can serve as a safety net for account holders, providing quick access to funds in emergencies, while also necessitating careful management to avoid excessive fees and debt accumulation.
