How long do you have to pay an overdraft back?

Overdrafts are handy. Especially when cash flow gets tight.

But it can be a costly headache if misused.

In this post, we’ll take a closer look at how overdraft repayment works. Plus, offer helpful tips along the way.

 

How long do you have to pay an overdraft back?

There is no set time to pay back an overdraft because repayments happen automatically when money is deposited into the account. Most banks expect regular deposits to keep the overdraft in good standing. If no deposits are made for several weeks—often 25 to 30 business days, depending on the bank—it might be treated as a default.

In that case, the bank could freeze the account or ask for the entire amount to be paid back.

That’s the overview. But there are several nuances.

Allow us to explain.

 

 

What is an overdraft?

An overdraft is a financial facility connected to a bank account that allows the account holder to withdraw more money than they have available in the account (up to a set limit). It works like a short-term loan to cover unexpected expenses or temporary cash shortages.

Basically, an overdraft lets you dip into extra funds when your account is empty.

Here’s how it works.

(And more importantly, how do overdrafts get paid back?)

Bonus tip: Build up emergency fund savings to help cover unexpected costs instead of relying on more debt.

 

How does an overdraft work?

An overdraft works by letting an account balance go into a negative balance below zero. This happens when more money is withdrawn or spent than is available in the account. The bank sets a limit for the overdraft and charges interest on the amount used (the outstanding balance). Then, when the account holder deposits money into the account, the money repays the interest, fees, and balance first.

So, what happens when you actually start using your overdraft?

Here’s how it works:

1. The bank provides money to cover transactions that go beyond the available balance.
2. The bank charges interest on the amount borrowed.
3. Any deposits into the account automatically reduce the overdraft balance first.
4. If a deposit does not cover the full outstanding balance, the account remains ‘overdrawn’, and interest charges continue to grow.

 

Pretty straightforward, right?

Let’s take a closer look at what happens when there’s a deposit that ‘pays back’ the overdraft.

 

How does an overdraft get paid back?

Deposits automatically repay an overdraft by reducing the negative balance. Deposits repay interest first, then fees, and finally, the principal balance. Banks expect regular deposits to keep the overdraft facility active. If no deposits are made for a specified period, usually 25 to 30 business days, the account may default, leading to actions like freezing the account, full repayment demands, and later legal action. 

 

Overdraft limits

Banks set an overdraft limit, which is the maximum amount that can be borrowed using the facility. Some banks charge additional fees when account holders exceed the overdraft limit. The bank may regard withdrawals that exceed limits as a default, which could have negative consequences.

This limit is based on:

1. The applicant’s creditworthiness: Banks assess credit scores and history to determine how much they’re willing to lend.
2. The applicant’s income: Regular income gives the bank confidence that the account holder will be able to repay the overdraft.
3. Account activity: A history of responsible account management (e.g., no frequent overdraws or bounced payments) can lead to higher limits.

 

⭐ Related content:

• What is a good credit score in South Africa (+ examples)
• How to build a strong credit score (with a simple checklist)

 

Minimum repayments

Although overdrafts don’t have fixed repayment schedules, some banks may:

• Require a minimum deposit to keep the overdraft active (e.g., a percentage of the overdraft balance).
• Encourage customers to pay back the overdraft within a specific timeframe.

 

It’s important to check with your bank to understand if minimum repayment terms apply.

 

Interest on overdrafts

Interest is charged on the amount borrowed, not the full overdraft limit.

How interest charges on overdrafts work:

1. Calculated daily: The bank charges interest based on the outstanding overdraft balance at the end of each day.
2. Compounded monthly: The accumulated interest is typically added to the account balance at the end of each month, increasing the total amount owed.
3. Overdraft interest rates may be higher than loans or credit cards: Overdraft interest rates tend to be higher than standard loans, making it expensive for long-term borrowing.

 

Plus, banks usually charge additional fees, such as:

• Monthly facility fees: A fixed fee for maintaining the overdraft, regardless of whether you use it.
• Unauthorised overdraft fees: For exceeding your limit without prior agreement.

 

 

Overdraft advantages and disadvantages

Advantages

• Provides quick access to extra funds during emergencies.
• No fixed repayment schedule, offering flexibility.
• Interest is charged only on the amount used.
• It can be useful for managing short-term cash flow issues.

 

Disadvantages

• High interest rates compared to other credit options.
• Penalties for exceeding the overdraft limit.
• Risk of falling into a debt cycle with prolonged use.
• Limited borrowing capacity based on your pre-approved limit.

 

See the trade-offs? It’s all about knowing when and how to use an overdraft wisely.

Now that we’ve weighed the pros and cons, let’s wrap this up.

⭐ Related content:

• What is a credit access facility? And how does it work?
• Revolving loans and credit—what are these credit facilities?

 

Final thoughts

Overdrafts can provide quick financial relief, but they come with costs and risks. Whether you choose an overdraft or an alternative, the key is to understand how it works and stay within your limits.

Staying on top of your overdraft is the best way to avoid any unnecessary financial headaches.

Otherwise, the debt will add up fast, and it could become a problem.

If you’re struggling with debt, we could help reduce how much it costs every month and free up some of your income for other critical expenses. Try our online assessment at My Debt Hero to see if you qualify.