Overdraft interest is the interest charged on the outstanding balance of an overdraft loan. An overdraft occurs when there isnt enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, its an extension of credit from the financial institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. As with any loan, the borrower pays interest on the outstanding balance of an overdraft loan. Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency. Interest rates from banks and building societies on their overdrafts range from 19% to 40% or more. The interest rate on the overdrawn amount is currently 21% and is charged separately from the fee.