overdraft

Definition 1

Loan arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current (checking) account customer can write checks or make withdrawals. The most common form of business borrowing, an overdraft is a type of revolving loan where deposits (credits) are available for re-borrowing, and interest is charged only on the daily overdraft (debit) balance. It is, however, also a demand loan: the facility can be cancelled (and entire outstanding amount 'called') at any time by the lender at its discretion, without any warning notice or explanation. If the overdraft is secured by an asset or property, the lender has the right to foreclose on the collateral in case the account holder does not pay. Calls happen usually where the (1) borrower's credit rating falls, (2) lender has reason to believe the borrower may go into default, or (3) borrower has not 'revolved' the overdraft in a satisfactory manner and has turned it into a hardcore debt. An overdraft is approved only for a fixed period (usually one year) after which it is must be renegotiated. In the US practice (where it is called line of credit or credit Line), the borrower is often required to maintain 10 to 20 percent of the approved overdraft limit as cash balance in the account, and must demonstrate its continuing financial health by managing without the overdraft for a one or two-month period (called cleanup period).

Definition 2

Balance of a bank account in which funds withdrawn have exceeded funds deposited.