Overdraft

An overdraft is a short-term line of credit granted by a bank to an account holder when checks presented against the account exceed the amount of cash available in the account. An account usually has to be designated as having overdraft protection before this feature will be operable. The amount of an overdraft is usually capped at an overdraft limit, so that account holders will not abuse the privilege. This service keeps account holder checks from bouncing.

The interest charges and transaction fees charged for overdrafts generate significant profits for banks. However, when faced with excessive usage and the prospect of not being paid back by an account holder, a bank may unilaterally cancel overdraft protection.

Similar Terms

An overdraft is also known as a bank overdraft.

Related Courses

Corporate Cash Management 
Treasurer's Guidebook