What is a bank overdraft?

A bank overdraft is indeed an agreement that allows account holders to withdraw more money from their bank account than what is currently available in the account, up to a specified limit. This financial tool provides flexibility for managing cash flow and unexpected expenses. For example, if an individual has a balance of €500 in their account but has an overdraft limit of €1,000, they can withdraw up to €1,000, effectively borrowing €500 beyond their available funds.

Understanding this concept is important for consumers, especially for managing short-term needs without having to apply for a loan. An overdraft can serve as a safety net for individuals and businesses, helping them cover bills or make purchases, ensuring they do not bounce checks or face penalties for insufficient funds.

The other concepts presented do not accurately describe an overdraft. Long-term loans refer to borrowing arrangements with fixed repayment terms and conditions, while investment accounts typically aim to earn a higher return on deposited funds. Personal loans usually involve fixed interest rates and structured repayments over time, differing significantly from the flexible nature of an overdraft.