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  5. What is an overdraft? And what's the difference between a 'formal' and 'informal' overdraft?

What is an overdraft? And what's the difference between a 'formal' and 'informal' overdraft?

An overdraft is how much you’ve spent over your agreed credit limit. So if your account’s at zero and you spend an extra £1, that means you’re at -£1. This is what you’d call an overdraft. And there are two kinds: formal and informal.

A formal overdraft is a set amount you can borrow, that you’ve agreed with your bank. There are no charges for this as it’s already been agreed by your bank, but you do pay debit interest on however much you go overdrawn by.

An informal overdraft is what happens if you spend more than you have in your account, or go over your agreed limit on your formal overdraft.

Learn more about overdrafts.

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