An overdraft is a credit facility linked to your bank account that lets you spend more than your available balance — up to a pre-approved limit. If your account has $500 and you need $800, the overdraft covers the extra $300.
Banks charge interest on the overdrawn amount for the number of days used. If you overdraw $1,000 for 10 days at 15% annual interest, the cost is roughly $4.10. This makes overdrafts flexible — you only pay for what you use, when you use it.
Overdraft limits depend on your account type, income, and relationship with the bank. Salary accounts often come with automatic overdraft limits (typically 2-3 times monthly salary). Secured overdrafts against fixed deposits or property offer higher limits at lower rates. Unauthorized overdrafts (going beyond your limit) carry penalty fees.