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Lenders vary in compounding frequency and rounding, so the real charge may differ slightly.
Interest applies to what you drew, not your limit
An overdraft or line of credit lets you draw and repay freely up to an approved limit. Unlike a fixed-term loan, interest is charged only on the amount you actually have outstanding, and only for the days you carried that balance — an unused limit costs nothing.
The formula
Interest = average balance drawn × annual rate × days ÷ 365. If the amount stayed the same all month, use that figure directly; if you drew and repaid at different times, use the average balance over the period.
Flexible, but the rate usually runs higher
The convenience of drawing only what you need, when you need it, is why overdraft rates typically sit above a comparable fixed-term loan. Carrying a balance for a long stretch usually costs more than taking out a term loan for the same amount up front.
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Frequently asked questions
QDo I pay interest on the full limit even if I don’t use it?
No. Interest accrues only on the balance you actually have drawn down, day by day. An approved but untouched limit costs nothing.
QWhy might this differ slightly from my real statement?
Lenders vary in how often they compound (daily vs. monthly) and how they round, so the real charge can differ slightly from this estimate.