Have you ever needed to buy something but didn't have enough money in your bank account? That's where an overdraft can help. An overdraft lets you spend more money than you have in your account – but it’s not free. You’ll need to pay it back, with interest.
Think of it like this: if you have £50 in your account but need to pay a £60 bill, an overdraft would let you cover the cost. But you’d owe the bank £10 — plus interest. Because of the high charges, it’s best used only for short-term emergencies.
There are two main kinds of overdrafts:
An arranged overdraft is when you and your bank agree beforehand how much extra money you can spend.
You can ask your bank for an arranged overdraft by:
An unarranged overdraft happens when you spend more than you have without agreeing it with your bank first.
Many banks will simply reject transactions that would take you into an unarranged overdraft. But if the payment is allowed, the fees and interest are usually higher than with an arranged overdraft.
Using an unarranged overdraft can also harm your credit score, especially if you go over your agreed limit or fail to pay the money back quickly.
Let's say you have £200 in your bank account. You need to pay a bill that costs £250. If you have an arranged overdraft, the bank will let you pay the bill. Your account will then show -£50 (minus fifty pounds). The minus sign means you owe the bank £50.
You can use your overdraft to:
But remember — you’re borrowing money. You’ll need to repay it with interest.
If you try to spend more than your arranged overdraft limit, your bank will usually reject the payment. This means the transaction won’t go through — whether you’re using your debit card, setting up a Direct Debit, or withdrawing cash.
Some important things to know:
If you’re worried about this happening, many banks offer alerts to warn you when your balance is low — or when you're close to your limit.
Yes, you can take money out from a cash machine using your arranged overdraft! The bank treats it just like your own money, but you will need to pay it back.
Banks don't let you use extra money for free. They charge you for it. This charge is called interest.
Most UK banks charge around 35–40% interest a year on overdrafts (this is called the EAR – Equivalent Annual Rate). The actual cost depends on how long you use your overdraft and how much you borrow. For example, if you borrow £100 for a year, you could owe £135–£140 — but if you pay it back quickly, you’ll pay less.
Banks now have to show this as a simple yearly rate, which makes it easier to understand what you're paying.
The amount you can borrow depends on your bank and personal circumstances — there’s no set limit for everyone.
Banks decide how much to offer based on:
Some banks offer small limits, like £100, while others may allow several hundred or even thousands of pounds. You’ll be told your exact overdraft limit when your application is approved.
If you need more than your current limit, you may be able to request an increase — but approval isn’t guaranteed.
Unlike some loans that have a set time to repay, overdrafts are different. They don't usually have a fixed date when you must pay them back.
However, this doesn't mean you can keep the money forever! Your bank expects you to pay it back when you can.
If you stay in your overdraft for a long time, the bank might:
If you're struggling to repay your overdraft, it's always best to talk to your bank. They can often help you make a plan to pay it back.
Your credit score is like a report card that shows how good you are with money. Using an overdraft can affect this score.
Using an arranged overdraft sensibly and paying it back quickly can actually help your credit score. It shows you can borrow money and pay it back properly.
But if you:
Then your credit score might go down. This could make it harder to borrow money in the future.
Overdrafts can be helpful when you need extra money, but they can also cause problems if you're not careful. Here are some tips to use them wisely:
An overdraft isn't the only way to borrow money. Other options include:
An overdraft can be a helpful tool when you need a little extra money for a short time. But just like any type of borrowing, you need to pay it back!
Using an overdraft wisely means understanding how it works, not using it too often, and repaying it quickly. If you do this, an overdraft can be a useful safety net for those times when your budget is stretched.
Remember, if you're ever worried about your finances or your overdraft, talk to your bank or a free debt advice service like Citizens Advice or StepChange. They're there to help you.
Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.
Fiona is a personal finance writer with over 7 years’ experience writing for a broad range of industries before joining Ocean in 2021. She uses her wealth of experience to turn the overwhelming aspects of finance into articles that are easy to understand.
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