Definition of overdraft

1. situation where a borrower draws money against a previously established line of credit. The basic cost to the borrower is the interest rate levied on the daily overdraft balance. The borrower typically pays interest only on funds used, since there is no compensating balance requirement, and only for the period in days for which the funds are taken. For this reason, the effective interest cost of an overdraft "loan" is the nominal or stated interest rate paid on the overdraft balance.
2. negative balance in a checking account caused by payment of checks drawn against insufficient funds.

1. amount by which a check exceeds the available balance in a checking account. Also, the negative account balance that results when a depositor writes checks exceeding the account balance. Bank customers who have an overdraft line of credit, called overdraft protection, can write checks for more than the account balance whenever they want, without fear that their checks will be returned or they will have to pay overdraft check fees for bounced checks. Also called "overdraft privilege" a bounce protection.
2. daylight overdraft to a bank's reserve account at a Federal Reserve Bank created when balances transmitted to other banks or third parties exceed the balance in its reserve account. The resulting funds shortage in the reserve account is a temporary situation ordinarily covered by incoming wire transfers from other banks. See also bilateral credit limit; overdraft cap; unwinding.
3. banking system in Great Britain and other European countries where depositors can write checks greater than their average balance, and can even maintain a negative balance, paying interest only on the negative balance. Also called overdraft banking.

extension of credit by a lending institution. An overdraft check for which there are not sufficient funds (NSF) available may be rejected (bounced) by the bank. A bounced-check charge will be assessed on the check writer's account. Alternatively, the bank customer may set up an overdraft loan account, which will cover NSF checks.

extension of credit by a lending institution. An overdraft check for which there are not sufficient funds (NSF) available may be rejected (bounced) by the bank. A bounced-check charge will be assessed on the check-writer's account. Alternatively, the bank customer may set up an overdraft loan account, which will cover NSF checks. While the customer's check will clear, the account will be charged overdraft check fees or interest on the outstanding balance of the loan starting immediately.