Finance glossary
Overdraft
Also known as: Arranged overdraft, Unarranged overdraft
In simple terms
An overdraft lets you spend more than you have in your current account, up to a limit. It is a form of borrowing, and you pay interest on whatever you go overdrawn by.
On this page
What does overdraft mean?
An overdraft is credit attached to your current account. It lets your balance drop below zero so you can keep spending when your own money has run out, up to a limit the bank agrees with you. Because it is borrowing, interest is charged on the amount you are overdrawn.
An “arranged” (or authorised) overdraft is one the bank has agreed in advance. An “unarranged” overdraft is when you go overdrawn without an agreed limit, or beyond it — something banks may refuse, and which used to attract far higher charges.
How overdrafts work
Since 2020, FCA rules mean banks charge a single simple annual interest rate (an APR/EAR) on overdrafts, rather than daily or monthly fees, and cannot charge more for unarranged use than arranged. Interest is worked out on the balance you are overdrawn by, for the days you are overdrawn.
An overdraft is designed for short-term, occasional use — dipping into it for a few days before payday. It is not built for long-term borrowing, and a persistent overdraft is usually an expensive way to owe money compared with a personal loan.
How could this affect me?
Used briefly, an overdraft is a handy buffer. Lived in month after month, it can cost more than you expect and signals to lenders that money is tight, which can affect future credit applications. Overdraft use also appears on your credit file.
Banks must monitor for people stuck in persistent overdraft debt and offer help. If you are always overdrawn, moving the balance to a cheaper form of credit — or getting free debt advice — is usually better than paying overdraft interest indefinitely.
Example
Illustrative cost of being £500 overdrawn for a full month at 39.9% EAR:
| Amount overdrawn | £500 |
|---|---|
| Overdraft rate (EAR) | 39.9% |
| Period overdrawn | 30 days |
| Approximate interest | About £14 |
Figures are illustrative and rounded. Rates vary widely between banks — check your own account’s rate.
Things to watch out for
- An overdraft is borrowing, not “your” money — interest adds up the longer you stay in it.
- Typical overdraft rates (often around 35–40% EAR) can be dearer than a personal loan or credit card.
- Living in your overdraft every month is a sign to switch to cheaper credit or seek advice.
- An unarranged overdraft can lead to payments being refused as well as interest charges.
Know your rights
- Under FCA rules, banks must charge a single simple interest rate on overdrafts and cannot charge more for unarranged than arranged use.
- Banks must identify customers showing signs of financial strain from persistent overdraft use and offer support.
- If you are treated unfairly, you can complain and escalate to the Financial Ombudsman Service.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- FCA, High-cost credit review: overdrafts policy statement (PS19/16) (opens in a new tab). Accessed 22 Aug 2026.
- MoneyHelper, Overdrafts explained (opens in a new tab). Accessed 22 Aug 2026.