An overdraft facility is a type of short-term credit offered by banks that allows individuals or businesses to withdraw more money than is currently available in their checking or savings account, up to a specified limit. It is essentially a safety net for managing temporary cash flow shortages. The bank allows the account holder to access additional funds, which they can repay later, typically with interest.

Key features of an overdraft facility include:

1. Pre-approved Credit Limit: The bank sets an overdraft limit, which is the maximum amount the account holder can borrow beyond their available balance. This limit is determined based on factors such as the account holder's financial standing, credit history, and banking relationship.

2. Interest and Fees: Overdrafts usually incur interest charges on the amount borrowed, which can be higher than standard loan rates. Some banks may also charge a fee for each transaction or for exceeding the overdraft limit.

3. Flexible Repayment: Unlike traditional loans, overdrafts do not have fixed repayment schedules. The borrower can repay the amount at their convenience, although interest continues to accrue until the balance is settled.

4. Types of Overdrafts:

   • Authorized Overdraft: A pre-approved overdraft limit set by the bank, which allows the account holder to borrow up to a certain limit.
   • Unauthorized Overdraft: When an account holder exceeds the authorized limit, it results in higher fees and interest charges. This occurs without prior approval from the bank and is generally seen as a riskier option for the borrower.

Advantages of an Overdraft Facility:

• Immediate Access to Funds: Provides quick access to extra cash during emergencies or for short-term financial needs.
• Flexibility: Borrowers can use the overdraft as needed, without the requirement for specific usage or repayment schedules.
• Interest Only on Withdrawn Amount: Interest is charged only on the amount overdrawn, not on the total credit limit.