What is an overdraft

What is a card overdraft

Put simply, an overdraft is the ability to have a negative account balance. For example, your debit card has only 50 thousand rubles, while the purchase price is 53 thousand. You can pay the missing amount using bank funds precisely thanks to the overdraft. In this case, when checking your balance, your card account will be negative by the exact amount you "borrowed" from the bank.

How an overdraft differs from a loan

Cardholders who are not very familiar with banking terms do not see a fundamental difference between a loan and an overdraft. But there is one. For greater clarity, we will demonstrate it in the form of a table.

Overdraft	Loan
The overdraft amount is quite limited and often does not exceed half of your salary. In rare cases, the credit limit may reach 100% of your monthly income.	You are practically unlimited in the loan amount—you can apply for anywhere from 30,000 to 5,000,000 RUB if you want to get unsecured funds, and up to 15,000,000 RUB if you take out a loan secured by real estate or a vehicle.
The overdraft repayment term rarely exceeds two months. In practice, you are required to repay the debt upon the very first deposit of funds into your account.	You can get a loan for a term ranging from several months to 30 years. You will have to make payments strictly according to schedule, most often in equal monthly installments.
The bank activates the service for the card automatically by analyzing your monthly account turnover.	To get a loan, you will need to submit an application and then provide the necessary documents: a passport, employment verification, and a proof of income statement.
An overdraft is a revolving service. As soon as the debt to the bank is settled, you will be able to use the credit limit again.

Types of overdraft

There are several classifications of overdrafts. One of them is by the reason for occurrence. Thus, the credit limit can be:

1. Authorized or approved. In this case, you sign an agreement for the provision of the service. Already at the time of using the overdraft, you know the credit limit, the repayment term, and the amount of fines and penalties for non-compliance with the terms.
2. Technical or unauthorized. Such an overdraft occurs as a result of various glitches—for example, when you cash out all the funds available in your account via an ATM, and the machine dispenses an amount twice as large as requested.

The withdrawal of money as a result of a technical overdraft does not relieve the cardholder of the obligation to pay off the debt to the bank. 

An overdraft is also divided into several types according to the terms of provision. Thus, it can be:

1. Salary-based. This type of overdraft is issued for a salary card. Monthly salary deposits are a guarantee that the client will pay off the debt to the bank in any case.
2. Advance-based. In this case, the bank activates the service for a legal entity upon opening an account based on a turnover statement from another credit institution.
3. Standard. This service is activated for legal entities a few months after opening an account based on data on monthly turnover.
4. Collection-based. The bank activates this type of overdraft for legal entities whose accounts are replenished with collected proceeds by more than 75%.

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Who is the overdraft service suitable for?

An overdraft is great for both individuals and legal entities:

• when a bank client frequently needs money for personal needs or business development, but does not have the opportunity to regularly submit applications to credit institutions and wait for the lender's decision;
• when a client receives regular deposits into their card account.

Since an overdraft, unlike credit card debt, must be repaid immediately—upon the very first deposit into the account—the service is worth activating for people with a stable income.

Pros and cons of an overdraft

Let's start with the advantages:

1. In terms of processing, an overdraft is quite simple—you do not need to gather documents or visit a credit institution's office. You can apply for the service on the bank's website or via the hotline.
2. You can choose not to use the overdraft. In this case, you will not have to pay a subscription fee for the service, while knowing that you can always withdraw an amount exceeding the limit on your debit card.
3. Debt repayment is just as simple as setting up the service. The bank will automatically debit the amount as soon as money is deposited into your account.
4. You can spend the overdraft at your discretion: to pay for goods or services, make transfers, or withdraw cash—the interest rate for using the service will be the same in all cases.
5. The bank may revise the credit limit when your salary increases or when other funds are regularly deposited into the account.

Now let's move on to the disadvantages:

1. The interest rate on an overdraft is significantly higher than that on a standard loan or even a credit card. Therefore, we advise using the service only as an absolute last resort.
2. While with a regular loan you are practically unlimited in amount, when taking out an overdraft you cannot count on more than half of your monthly account deposits.
3. You can repay a loan or credit card in installments with comfortable minimum amounts. You will have to pay off an overdraft debt in a single lump sum.
4. The period for repaying an overdraft debt does not exceed two months (terms vary by bank). If you do not pay off the debt within this time, the lender will charge fines and penalties.

How to get an overdraft

Getting an overdraft is not that difficult. First, you need to contact a bank employee via the hotline and check if you are eligible to activate the service. Some credit institutions allow you to do this in your online account on the website. After receiving a positive decision on your application, you will need to visit a bank branch and sign the agreement.

Client requirements

Not every salary cardholder can activate an overdraft. To get this service, you must meet the following bank requirements:

• have citizenship of the Russian Federation;
• have permanent registration within Russia;
• be over 18 years old;
• be officially employed;
• have no current debts on loans and microloans.

Required documents

No special documents are required to activate the service—the bank decides on the feasibility of providing an overdraft based on your account turnover. Nevertheless, the credit institution may ask you for your SNILS or INN.

How to disable an overdraft

You can deactivate the service in one of three ways:

• on your own via online banking or the mobile app;
• with the help of a specialist via the hotline;
• at the nearest branch of the credit institution.

An overdraft is a useful service. With its help, you can make purchases when you have no personal funds in your account and there is still a whole week left until payday. However, the interest rate for using bank funds is significantly higher than the overpayment on a loan or credit card, so we advise using the service only as an absolute last resort.