Overdraft ProtectionFinancial Dictionary -> Banking -> Overdraft Protection
Usually, it is the bank manager who checks the list of overdrafts on a daily basis. If he or she notices that a preferred customer has an overdraft, it is at their discretion to cover the overdraft for this client. Traditionally, banks didn't charge for this type of ad-hoc coverage. However, due to the discretionary nature of the service, charges could apply.
There is only one exception, and it is in the form of force pay lists. Every working day, the branch manager of your bank receives computerized list for the accounts that are held in their branch, state, or city. These lists contain items which are pending rejection. In general, if the client manages to make a transfer or comes to the branch in person, covering the amount for the item that is pending rejection, it is in the authority of the manager to force pay the item. In case extenuating circumstances are present, the manager can also take the risk and pay the item. This is not a common practice, however. The payment should be done by a certain time or the item's status switches automatically from 'pending rejection' to 'rejected'. In this case, no further action can be taken.
With overdraft protection, the interest rate is usually very high. It is less costly, however, than a bounced check fee if paid off quickly. Some banking institutions also impose a fee in case the account balance drops below zero. The charges apply even if the holder of the account has an overdraft protection. Again, it is considerably less expensive that the bounced check fee. In view of the interest costs, the overdraft amount may be considered a type of loan. Therefore, bans will charge interest until the loan is repaid. It is less expensive than having to pay a flat fee for every overdraft on your account.
Many banks charge clients for overdraft protection. This is done to stop them from abusing the service. In addition, it is a revenue source for the banks. So, it is important to know what charges apply before you opt for overdraft protection. In the typical case, they will be similar or the same as the non-sufficient-funds fee.
The cost of overdraft protection is an obvious disadvantage. The main benefit is that the person you posted a check to will not be aware you didn't have enough money. So, you will not be embarrassed if you wrote check to your business partner or a friend. Avoiding bounced check fees is the other benefit. In that case, you don't have to pay a returned check fee to the respective retailer as well as NSF or non-sufficient-funds fee.