Overdraft coverage is money that is provided to complete a transaction when a person overspends. In some instances, these funds are loaned to an individual by her financial institution. In other instances, these funds may be drawn from other accounts that a person has. Overdraft coverage is controversial for a number of reasons, including the total cost of such services and the lack of emphasis on financial responsibility.
When a person tries to conduct a financial transaction, she generally needs to have sufficient funds to cover the cost of it. Overdraft coverage, also known as overdraft protection, allows a person to proceed with the transaction despite having insufficient funds. Consider, for example, that an individual goes into a store and attempts to use her debit card to purchase $45 US Dollars (USD) worth of groceries but she only has $30 in her account. Without some type of assistance, this transaction could not be completed and she would need to reduce the costs of her bill.
In many instances, the funds that are used to complete the transactions are provided by the financial institution that holds the account that is being used. When overdraft coverage is provided, a person is generally required to repay the amount that was loaned and an additional amount, which is usually referred to as an overdraft fee. Some financial institutions charge additional overdraft fees when the debt is not settled within a certain number of days.
The fees that are associated with overdraft coverage cause much of the debate about this type of service. The amount that the financial institution provides to complete a transaction is often small. The fees, however, may be several times greater than that amount, making this an expensive means of conducting business. This led to legislation in the U.S. in 2010 that bars financial institutions from automatically extending this type of service for certain transactions. Instead, people who would like this type of coverage need to opt in before receiving it.
Sometimes overdraft coverage is provided from a person’s own financial resources. If, for example, a person has a checking account and a savings account, he may agree to allow funds to be taken from his savings account if he overdraws from his checking account. There may be a fee for this service, but when there is, it tends to be substantially lower than those for bank-provided coverage. Overdraft protection of this type is also controversial because many argue that consumers need to be financially responsible and that overspending should be discouraged.