Overdraft Definition

When a person writes a check drawing more funds than are available in the checking account there can be several results including a bounced check or an overdraft. In an overdraft, the person’s financial institution honors the check by extending a loan to the checking account holder. The bank then expects the account holder to repay the loan, though terms will vary depending upon the exact nature of the overdraft. Some checking accounts feature an automatic overdraft protection where no penalties accrue, while other checking accounts may allow occasional overdrafts but only with a penalty.