Overdraft facility

What is an Overdraft Facility?

An overdraft facility is a credit agreement made with a bank or other financial institution that permits an account holder to use or withdraw more than they have in their account, without exceeding a specified limit. This functions as a short-term loan to cover urgent financial needs or unexpected expenses. It is commonly used by individuals, businesses, and homeowner associations.

How it works

Overdrafts are pre-negotiated loans that are automatically available when an account falls below zero. The bank sets a limit, which can be a few hundred to thousands of dollars, depending on the account holder’s creditworthiness and banking history. The account holder can continue to withdraw money up to this limit.

However, using an overdraft facility often comes with fees and high interest rates. These charges are automatically deducted from the account. Therefore, it’s important to manage an overdraft facility carefully to avoid accruing large debts.

Overdrafts and Homeowner Associations

For homeowner associations, an overdraft facility can provide a safety net in case of unexpected expenses or delays in member’s dues. It can help keep the association’s operations running smoothly in times of financial crunch. But, the association must be mindful of the high interest rates and fees associated with overdrafts.