Benefits, costs and limits of overdraft protection in Canada

Overdraft protection can save you money on fees if your account balance dips below zero. But you’ll pay a small fee for the convenience and be charged interest on the negative balance.

Keep reading to learn all about how overdraft protection works, how much various banks in Canada charge for it and about alternatives to help you save even more.

What is 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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Overdraft fees

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.

What is an NSF 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.

Summary: Bank overdraft interest and protection plan costs

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

Types of overdraft protection in Canada

There are two types of overdraft protection you could come across in Canada: Basic protection and linked account protection.

Basic overdraft 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

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.

How to apply for overdraft protection

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).

How are overdraft fees calculated?

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%.

Alternatives to bank account overdraft protection

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 a monthly subscription fee.

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.

Overdraft protection pros and cons

Who benefits from overdraft protection?

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.

Tips for avoiding going into overdraft

The best way to avoid going into overdraft is to keep your finances healthy. To help keep your finances in good shape you should:

• Check your balance. Overdraft fees can add up quickly, so stay up-to-date with your finances by checking your balance, setting up push notifications on your banking app when your balance falls below a certain threshold. You could also use an app like Mint to get notifications when your bills are due so you can make sure you have enough money in your account to cover them.
• Use ATMs with caution. Certain machines will let you withdraw money you don’t have, potentially leading to hefty overdraft fees.
• Be aware of pending balances. Account balances displayed on ATMs and online may not always be correct. Recent purchases can take time to show up, so factor in any recent pending purchases when deciding what you can spend.
• Know how much you can handle. Steer away from spending too much by choosing the lowest possible overdraft protection limit.

Is a chequing account with overdraft protection a good idea?

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:

• It can be an expensive form of borrowing. Depending on the interest rate your bank offers, the interest can add up.
• Be especially careful if you have more than one chequing account. If you spread your money between different accounts, you may accidentally end up using your overdraft even if you don’t actually need it.

Ultimately, it all comes down to how much your bank charges. There are chequing accounts with relatively low-cost overdraft protection. For instance:

Some tips if you’ve already gone into overdraft

Here are some tips to help you avoid fees and make the best use of your overdraft:

• Figure out how much you need to pay back. Collate all the fees that apply to you and figure out if you need to pay off the loan on demand.
• The faster you pay off your debt, the better position you’ll be in. Discover if there’s a time limit. You may have to pay your overdraft by a specified time so it’s wise to repay the amount you owe as fast as you can to lower the level of interest you might incur. Once you’ve paid back the money, it’s a good idea to cancel the overdraft so this doesn’t happen again.
• Judge your spending habits. Do you spend more than you earn on a regular basis? If you’ve had to deal with several overdrafts, it might be time to sit down and write up a new budget. If you need a few pointers, check out our helpful guide on how to make a budget.

Can you switch chequing accounts if you have overdraft protection?

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.

How to compare bank accounts with overdrafts

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.

Alternatives to overdrafts

Overdrafts are definitely not your only option when it comes to borrowing:

• Credit cards. If you often end up overspending one month only to make up for it the following one, getting a credit card can be much better than dipping into your overdraft. As long as you clear your balance in full every month, you won’t be charged any interest. Learn more about transferring money from a credit card to a bank account.
• Personal loans. If you already know you’re going to have to borrow money in the near future, or are looking to fund a medium-to-long-term project, there’s really no point in relying on your overdraft. A personal loan will probably be more suitable for your needs.

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?

Related: Explore the best money-saving apps in Canada

Bottom line

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.

Frequently asked questions about overdraft protection

• How much is overdraft interest?

  Overdraft interest is usually between 19% and 22% per year depending on the bank's fee strcuture.

• Is it a good to have overdraft protection?

  Overdraft protection can be good if you're learning how to budget or have to manage a complex payment schedule. But the total cost of overdraft coverage may be a burden if you rely on it too much. Overdraft fees are cheaper than NSF fees, but you still have to pay interest. Plus, going over your overdraft limit can result in more NSF fees.

• What does $200 overdraft protection mean?

  $200 overdraft protection means you won't pay NSF fees for spending up to $200 more than your account balance. There may be a flat fee for $200 overdraft protection (unless your chequing account plan waives this), and you'll pay interest on the overdraft amount.

• Can my bank withdraw my overdraft?

  Yes, your bank can remove your overdraft protection any time. Ongoing coverage is not guaranteed. But if your bank cancels your overdraft with no warning and you are charged as a result, you might be able to file a complaint.

• How much overdraft can I get?

  The size of your overdraft will depend on a range of factors including your credit limit and your income and outgoings, but typically range between $100 and $2,000 in Canada. The better your credit score and the more you earn, the higher your overdraft is likely to be.

  If you are offered a smaller overdraft than you would like, you may be able to extend it after some time, providing you have managed your bank account sensibly.

• Will banks always cover an overdraft?

  No, your bank has the right to decline any transaction you can't pay for. But if you've been approved for overdraft protection, you'll usually be covered if you spend more than your balance (up to your overdraft limit).

• Can my bank charge an overdraft fee if there's a deposit pending?

  Yes, your bank may charge an NSF fee or overdraft fee even if you have a deposit pending. However, banks often give you a small window of time (usually around 24 hours) to cover overdraft amounts before charging a fee.

• Can I get an overdraft fee waived?

  Yes, some chequing account plan waive the overdraft fee, although you'll still have to pay interest. These accounts are usually premium, which means that you'll get more perks—like unlimited transactions, free cheques or waived credit card annual fees—but the monthly fee will be higher than a basic chequing account.

  If your bank plan doesn't come with waived overdraft protection fees, contact your bank to see if you can get a one-time fee waiver.