An overdraft lets you spend more than you have in your bank account — up to an agreed limit. In NZ, they’re expensive when used heavily but useful as an emergency buffer. Here’s how they work.
NZ overdraft interest rates are typically 19–22% p.a. — expensive. A small pre-approved overdraft ($500–$1,000) is useful as a safety net to prevent dishonoured payments. Don't use it as a regular credit facility — a personal loan or credit card is cheaper for genuine borrowing.
What Is an Overdraft?
An overdraft allows your bank account to go below zero, up to a pre-agreed limit. In New Zealand, there are two types:
| Type | What happens |
|---|---|
| Arranged overdraft | Pre-approved by the bank — account can go negative up to agreed limit; interest charged on overdrawn balance |
| Unarranged overdraft | Account goes negative without pre-approval — bank typically dishonours the payment instead, charging a dishonour fee ($5–$20) |
Most NZ banks prefer to dishonour payments rather than allow an unarranged overdraft — meaning the payment fails and you’re charged a fee, rather than letting your account go negative.
NZ Overdraft Interest Rates
Overdraft interest rates in New Zealand are high — typically in the same range as credit cards:
| Bank | Arranged overdraft rate (approximate) |
|---|---|
| ANZ | ~19.95% p.a. |
| ASB | ~19.95% p.a. |
| BNZ | ~19.95% p.a. |
| Westpac | ~19.95% p.a. |
| Kiwibank | ~19.95% p.a. |
Rates vary — check directly with your bank for current rates.
Interest is charged only on the overdrawn amount, calculated daily and charged monthly.
Example: $500 overdrawn for 15 days at 20% p.a. = $500 × 20% ÷ 365 × 15 = $4.11 in interest
For short-term use, the actual dollar cost is small. The danger is when an overdraft becomes a persistent state.
How to Apply for an Overdraft
Most NZ banks offer personal overdrafts of $500–$10,000:
- Apply via internet banking, mobile app, or at a branch
- Bank assesses your income, expenses, and credit history
- If approved, the overdraft limit is added to your account
- Your account can then go to negative up to the approved limit
- Interest is charged on any overdrawn balance
Eligibility considerations:
- Regular income credited to the account
- Good credit history (no recent defaults)
- Existing relationship with the bank
When Does an Overdraft Make Sense?
Good use cases
- Timing gap before payday — salary lands in 3 days but rent is due today; use the overdraft and repay immediately when paid
- Safety net for dishonours — a small overdraft prevents the $5–$20 dishonour fee on a missed direct debit
- Self-employed with irregular income — buffer between invoice payment and business expenses
Poor use cases
- Regular spending beyond your means — an overdraft doesn’t fix a budget problem
- Large purchases — the interest rate is too high; a personal loan is cheaper
- Carrying a persistent balance — at 20% p.a., $2,000 overdrawn costs $400/year in interest
Alternatives to an Overdraft
If you need to borrow, there are almost always cheaper options:
| Need | Better alternative |
|---|---|
| Short-term cash gap (days) | Small arranged overdraft as safety net |
| 1–6 months borrowing | Personal loan (8–15% p.a. — less than overdraft) |
| Regular purchases | Credit card — 44–55 days interest-free if paid in full |
| Emergency fund | Build a $1,000–$3,000 savings buffer instead |
| Large purchase | Personal loan at 8–15% p.a. |
The Dishonour Fee vs Overdraft Trade-off
If you don’t have an arranged overdraft and your account goes below zero, the bank will typically:
- Decline the payment (the merchant or utility doesn’t receive funds)
- Charge you a dishonour fee of $5–$20
On a $30 power bill, a $10 dishonour fee represents a 33% effective cost for missing the payment. An arranged overdraft of even $200 would prevent this entirely — and the interest on a 2-day overdraft to cover the bill would be cents.
Verdict: A small arranged overdraft ($500–$1,000) is a sensible safety net for most NZers, even if you never plan to use it.
Overdraft vs Credit Card for Short-Term Borrowing
| Factor | Overdraft | Credit card |
|---|---|---|
| Interest rate | 19–22% p.a. | 12.9–25.99% p.a. |
| Interest-free period | No | Yes (44–55 days if paid in full) |
| Setup | Pre-approved facility | Separate card application |
| Convenience | Automatic — just spend | Use card for purchases |
| Best for | True emergency gap | Regular purchases |
If you’re using an overdraft for regular spending, a low-rate credit card (paid in full monthly) is more structured and often cheaper. See best low interest credit cards NZ.
What to Do If You’re Stuck in an Overdraft
If your account is persistently overdrawn:
- Stop the bleed — identify what’s causing the overdraft and fix it
- Talk to your bank — they may be able to restructure the facility or convert it to a personal loan at a lower rate
- Get financial advice — MoneyTalks NZ (free): 0800 345 123
- Don’t ignore it — overdraft interest compounds and the problem grows
MoneyTalks is a free NZ government-funded financial counselling service — not a debt collector, not a lender.
Next Steps
- Banking fees NZ — dishonour fees and other costs to avoid
- Best low interest credit cards NZ — if you need to carry a balance, do it cheaper
- Best savings accounts NZ — build a savings buffer to avoid needing an overdraft
- Personal finance NZ — budgeting and emergency fund basics