When money is withdrawn from a bank account and the account balance dips below zero, this is known as an overdraft.
In almost all circumstances, going into overdraft means paying an NSF fee. To avoid expensive costs associated with overdrafts, many banks and financial institutions offer overdraft protection.
Overdraft protection is a feature available to add on most chequing accounts in Canada that allows you to continue using funds from your chequing account even when you don’t have any money in your account.
One of the main perks of overdraft protection is that it helps you avoid expensive non-sufficient fund (NSF) fees. NSF fees are charged when you don’t have enough money in your account to cover an attempted withdrawal.
Without overdraft protection, each NSF fee could cost you $45 or more. With overdraft protection, you avoid the expensive NSF fee, but will instead pay a smaller overdraft protection fee and interest.
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By signing up for overdraft protection you are essentially agreeing to a short-term loan from your bank or financial institution. This short-term loan is triggered any time your account is overdrawn, and is automatically issued for the exact amount needed to cover the shortfall.
For example, if you had $50 in your account and your insurance company tries to withdraw a bill payment of $150, your account would be overdrawn by $100.
Since you’re effectively borrowing money, you’ll often be charged interest of around 21% in addition to the overdraft fee.
Your bank charges a non-sufficient fund (NSF) fee, when you spend more than you have in your chequing account. Each NSF fee can cost you$45 or more per withdrawal attempt, which can add up if you forget about automatic bill payments or have trouble keeping track of your balance.
We’ve summarized Canadian bank and credit union overdraft interest rates and overdraft protection plan costs here:
| Bank | Overdraft interest (per annum) | Protection plan cost |
|---|---|---|
| RBC | 22% | $5/month |
| TD | 21% | $5/month |
| CIBC | 21% | $5/month |
| Scotiabank | 21% | $5/month |
| BMO | 21% | $5/month |
| National Bank | 21% | $5/transfer (up to once per day) |
| Tangerine | 19% | $5/use (up to once per month) |
| Laurentian Bank | 22% | $5/month |
| Coast Capital | 21% | $5/month |
| Alterna Savings | 19.99% | $2.50/month or $5/day per use |
There are two types of overdraft protection you could come across in Canada: Basic protection and linked account protection.
Basic overdraft protection is essentially a loan from the bank to cover expenses (like bill payments and debits) that would otherwise bounce due to lack of funds. When your bank covers the difference for insufficient funds, the overdrawn amount will be automatically repaid to the bank from your next deposit.
Like with any loan, you’ll have to pay interest on the overdrawn amount along with a small fee.
Linked account overdraft protection enables your bank to automatically transfer funds from a linked account to cover a transaction you’ve charged to a chequing account with insufficient funds. Linked accounts can often include a savings account, credit card or line of credit.
Because the bank isn’t lending you the money to go into overdraft with linked protection, you won’t have to pay interest on the overdrawn amount. Still, the bank will typically charge a fee for transferring money.
Also, depending on the type of account you choose to link, you may have to pay interest or cash advance fees on the money trasnferred from the account.
Most chequing accounts will ask if you’d like overdraft protection when you initially set up the account. If you didn’t add it as part of your account coverage when you first opened the bank account, not to worry, as most accounts will let you add this protection (if offered) at any time.
In most cases, you can apply for overdraft protection online or from your banking app. When setting up overdraft protection, you’ll be asked what overdraft limit you’d like and you may need to approve a credit check.
The overdraft limit is the maximum amount your bank will cover should your account go into overdraft. In Canada, typical overdraft limits are between $100 and $3,000.
Overdraft protection provides a buffer against accidental overspending. Check out our guide to the best no-fee chequing accounts to find out which accounts include overdraft protection in the monthly fee (subject to credit approval).
Overdraft protection comes with 2 types of fees: A service fee and interest. The service fee is a flat fee, often around $5.00, paid monthly or every time you use overdraft protection (you may get to choose, or your bank may only offer 1 of these options). This fee may be waived with some chequing accounts.
Regardless of whether the flat fee is waived, you’ll pay interest on your overdraft balance. Interest rates vary but generally fall between 19% and 22%.
Instead of counting on overdraft protection, it may be cheaper to get a small loan from cash advance apps in Canada. You pay no interest on these cash loans, but you may pay either an optional or required monthly fee depending on the provider.
If you only need a small amount to hold you over to your next pay, these small cash advance loans may be cheaper compared to the approximately 21% interest charged on your overdraft balance from your bank.
A buffer against accidental overspending, overdraft protection is good for those who are learning to manage their money. It’s useful when teaching kids how to spend responsibly. Teens who are just beginning to take on adult responsibilities like budgeting and paying bills can benefit from having a safety net for accidentally overlooked expenses. If you’re a student on a tight budget, avoiding expensive NSF fees is a big plus.
Overdraft protection is also good if you manage a complex schedule of recurring bills and automatic payments. It can be tough to keep track of what comes out of your account and when payments are due. Having a buffer can reduce the stress of paying costly NSF fees.
The best way to avoid going into overdraft is to keep your finances healthy. To help keep your finances in good shape you should:
In theory, there’s no harm in at least applying for overdraft protection and having it as a backup on your bank account. When used sparingly, overdraft protection can be much cheaper than NSF fees. However, if you do use overdraft protection, be aware of the catches:
Ultimately, it all comes down to how much your bank charges. There are chequing accounts with relatively low-cost overdraft protection. For instance:
Here are some tips to help you avoid fees and make the best use of your overdraft:
Yes, you can. Having overdraft protection doesn’t prevent you from opening and closing any bank account — as long as there is no money owing on the overdraft.
If you’re looking for a bank account with cost-effective overdraft protection, it’s important to consider how often you’re likely to use your overdraft and how much you’ll be charged for doing so.
Some bank accounts offer interest-free overdraft protection, while others do not charge a flat-fee, but do charge interest on any borrowed amount. The key is to know how you will use the overdraft protection and to calculate what it would cost for each account you are interested in opening.
To find the best bank account for your needs, check out Finder’s guide on the best chequing accounts by feature. If cutting costs is your main goal, consider narrowing your search to chequing accounts with no or low fees.
Overdrafts are definitely not your only option when it comes to borrowing:
Finally, if you find yourself overusing your overdraft, maybe the time has come to do a bit of budgeting and reorganize your finances. If it sounds like a daunting task, why not try a budgeting app?
An overdraft can be a handy addition to your bank account and can offer a valuable safety net in the event an unexpected payment pushes you into the red, for example. Applying for an overdraft is usually straightforward and there are a few low cost options available.
However, it’s important to stay within your overdraft limit and try to pay back the amount borrowed as soon as possible. Otherwise, the more you rely on your overdraft, the harder it will become to get out of it.
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