An overdraft is short term credit attached to a transactional account. You spend more than your balance, the bank covers it up to an agreed limit, and you pay interest on the drawn amount. It is flexible, but often expensive if you treat it as permanent capital.
Key takeaways
- Authorised overdrafts have agreed limits; unauthorised ones can carry heavy fees.
- Interest usually accrues daily on the balance actually used.
- Clear it when cash arrives; revolving forever is a warning sign in your budget.
- Compare the effective cost with a small fixed loan if you need money for months, not days.
Why it matters in Ethiopia
Salary accounts and SME working accounts often rely on overdraft style flexibility. Used for a brief gap it can be useful; used as long term funding it quietly erodes profit and household cash.